Unit 6 - External Influences on Business Activity

External factors affecting the business meaning:

There are two types of factors influencing business decisions: internal and
external. Internal factors are elements that come from within or are under a
company's control, e.g. human resources, organisational structure, corporate culture,
etc. External factors, on the other hand, are elements that come from outside, e.g.
competition, new technology, and government policies.

External factors are elements from outside the company that affect business
performance, such as competition, economic climate, political and legal environment,
technological advances, or major global events.

External factors affecting business

There are five main types of external factors affecting business:

1. Political
2. Legal
3. Economic
4. Social & demographic
5. Technological
6. Environmental/ Natural

Political and legal factors affecting business:

A range of political decisions can help to determine the business environment. For
example, many countries operate minimum wages which can result in businesses
paying increased costs for labour. Additionally, businesses face a variety of laws which
constrain many of their activities including the emission of noxious gases and
contributions to employees’ pensions

How government control business activity?

Changes in tax, interest rates, and inflation can result in a rise or fall in aggregate
demand, which affects economic activity. For example, with lower taxes, individuals
and households have more income at their disposal to spend on goods and services.
This contributes to higher demand, resulting in more production and jobs created. As a
result, business activities grow and the economy flourishes.

One measure of economic performance is aggregate demand. Aggregate demand is the total demand for
goods and services within an economy (including consumer and government spending, investing, and
exports, minus imports). The higher the aggregate demand, the more robust an economy is. However, too
much demand can lead to high inflation, resulting in higher prices for consumers.
Governments have a responsibility to make sure that the business environment
is one
1. where competition is fair,
2. that workers 'have healthy and safe conditions,
3. that consumers are given accurate information and are protected from faulty or
4. dangerous products,
5. and that businesses are encouraged to set up in the best places to contribute to
the life of the country.

They pass laws and use regulations to achieve these objectives. Much of this is aimed
at the primary objective of improving the way that markets work so that they are fair
to everyone involved –
1. Producers,
2. suppliers,
3. advertisers,
4. consumers,
5. employees,
6. investors and
7. society as a whole.

Employment and conditions of work law: Employment law varies from country to
country, but most countries have laws that deal with most if not all of these topics
1. Protection of health and safety of employees
2. minimum pay or wage levels
3. contracts of employment, unfair dismissal, and redundancy arrangements
4. prevention of discrimination against certain groups of people based on their
characteristics, such as disability, age, religion, gender, and sexual orientation.
5. Parenting rights and workplace harassment/bullying
6. membership of trade unions

These laws add costs and create the need for record-keeping and employees to
monitor them, but they also lead to more committed and secure employees and lower
costs as there will be fewer accidents, legal costs and court cases.

Marketing behaviour - consumer protection law

Businesses are very often large or small enough to disappear easily if there is a
problem. This means that compared to consumers, they have a lot of power if there is
a problem. 1Businesses may be tempted to sell faulty or unsafe products
or to use persuasive unethical selling techniques to get consumers to buy. Most
countries have laws related to these areas, ensuring that:
 1. goods are not faulty, are safe, and are for the purpose they are sold
2. goods and services provided are what was described
3. weights, measures, and sizes are accurate
4. food products are safe to eat and prepared in hygienic conditions
5. advertising gives accurate descriptions of the products or services and does not
exp1loit anyone,. such as children

These may add costs or 1imit the way a business may behave. but governments have
a responsibility to make sure that consumers are protected. Having laws means
businesses quickly adapt to the requirements and consumers can have more
confidence when they buy.

Competition law:
Goods and services are sold in markets where there is competition between providers.
Businesses might be able to limit competition to their own advantage - for example by
getting together and all agreeing to sell at a high price, forcing consumers to pay more
than if there was real competition. Competition law aims to bring about: as much
competition as possible so that suppliers are encouraged to become more efficient,
lower costs and prices and provide choice to consumers. Competitive law usually deals
with fair trading requirements and pro-compaction laws.

unfair practices that might be banned include:

1. price fixing and price agreements
2. information- sharing agreements
3. producers refusing to sell to retailers unless minimum prices are set
4. sole supplier arrangements - suppliers only supply if no competitors are allowed
5. predatory pricing

Pro-competition Laws include

1. banning carte1ls
2. investigating monopolies to make sure that these are not acting against
consumer interests
3. investigating proposed mergers and takeovers to make sure they will not result
in unfair monopoly power
Competition law is a cost to the government and businesses that have to check they
are in line. lt requires sophisticated analysis of markets and may take time to be
introduced in a way that works.
Other laws. including location decisions and particular products:
Governments may introduce a range of other laws that affect businesses. For instance,
there may be planning requirements to be met when setting up a factory, office or
shop. There may be restrictions on pollution that require equipment to clean up smoke
or chemicals. There may be noise limits on industrial premises and limits to lorry
movements, or business operations may
be restricted to daytime hours.

The impact of international agreements on businesses

Most countries have signed up to a number of international agreements setting up
common regulations and behaviors. Businesses must then act in line with
the agreements.
Examples include:
1. World Trade Organization or regional l trade agreements (e.g. the Asia Pacific
Trade Agreement) setting out free trade arrangements
2. The United Nations-based Kyoto Agreement on restricting carbon emissions
3. International labor, Organization standards on employment & conditions
4. The United Nations Law of the Sea setting out Mineral rights; fishing rights and
ownership rights
5. Internationally agreed accounting standards. Particular examples include
businesses having to:
6. Design products to meet particular standards of safety
7. Reduce pollution or use less energy
8. set out their accounts to include corporate social responsibility factors

Governments key macroeconomic objectives and their impact on businesses

Governments set objectives for the economy. The priority placed on each objective will
determine which policies are implemented, when, and by how much. It is this
implementation that is important for businesses rather than just the setting of
objectives. Important government objectives include achieving:

1. low unemployment
2. low inflation
3. stable exchange rates
4. growth
5. transfer of wealth
low unemployment:
People who want to work should be able to find work. The reason why
governments have an objective of low unemployment fs because high unemployment is
a cost to a country. It causes
1. a waste of human resources that lowers overall production and economic growth
2. social problems like drug taking and personality problems
3. a cost to the whole country ln benefits, lost taxation and increased
4. crime levels

High unemployment: High unemployment means there are relatively more workers
seeking the available Jobs. In turn this causes:

a low consumer income. which means sal1es are lower and competition is greater;
leading to low output ,low profits and pressure to cut costs and reduce prices

1. redundancies and rationalisation

2. a consumer switch to lower-priced, lower quality products
3. Employees fearing the 1loss of their Jobs, which means they will work harder and
complaints
4. easy recruitment of already skilled employees
5. low wages as scarcity of Jobs means workers will work for less
6. investment falls

low inflation
Inflation is a persistent increase in the general level of prices. Risi1ng prices mean that
the value of 'money in a country falls. The reason why governments have an objective
of low inflation is that a high level means uncertainty

because it:

1. erodes the value of savings and makes borrowing more attractive

2. makes planning and fixing contracts difficult
3. might lead to hoarding

Possible impacts of high inflation on businesses are:

1. increased borrowing for investment as asset values will rise with no effort
2. increased costs of materials, fuel and labour
3. It is easier to increase prices and pass on price rises of materials and labour
4. Consumer spending lowers as prices rise
5. price becomes a more important marketing mix element
6. increased pressure from employees for higher wages
7. increased difficulty in tracking and setting prices
8. a country's products become less competitive and l1ess attractive to foreign
investors
Stable Exchange rates:
The exchange rate of a country's currency is its price· in terms of other currencies. A
stable exchange rate means that the price remains the same over time, so the prices
of exports and imports do not keep changing. This makes financial planning and pricing
easier. But note that exchange rates are only one factor in decisions on exporting and
importing.

Impact of stable exchange Rates: Stable exchange rates make planning easier and
more certain for importers and exporters. Unstable exchange races have the following
effects:

Impact of Unstable Exchange Rates: Rising exchange rates mean that exporting
businesses become less competitive. Prices of exports rise in the importing country and
the volume of exports falls. The extent of the fall will depend on the price elasticity of
demand.
1. Rising exchange rates mean that importing businesses become more
2. Competitive Prices of imports fall in the importing country and the volume of
imported goods increases. The extent of the increase will depend on the price
elasticity of demand
3. Falling exchange rates mean the reverse of the above.

Growth:
Growth is an increase in economic activity, usually measured by a rise in gross
domestic product (GDP). Economic growth means there is more wealth, and consumers
will be able to buy more, and the government can provide more facilities such as
education; health services and 1nfrastructure. Growth can be achieved by more use of
resources ,higher Investment, a more skilled workforce, higher exports, or higher
consumer spending.

Possible impact of economic growth on businesses: Possible impacts of economic

growth are

1. Sales and profits increase as consumers' incomes rise

2. Sales of luxury items rise relatively more than sales of basic produces
3. new product launches are likely to increase
4. more investment and new technology are likely
5. employment increases; unemployment falls
6. tax revenues increase
7. it may be more difficult to recruit suitable skilled labour

Transfer of wealth:
Governments are concerned not just with 'the level of GDP and income but with which
groups in the country have the wealth and income. Governments generally have
objectives related to this. For example, they might wish to:
1. pay benefits to those on low incomes, the unemployed or disabled
2. get those on high incomes to pay relatively more taxes
3. transfer wealth and income from richer to poorer parts of the country
4. Provide cheap housing for those on low incomes
5. Encourage or discourage certain products or industries

Possible Impact of wealth transfer in business:

1. Income tax, wealth/property taxes and benefits will redistribute income and wealth
from richer to poorer and spending patterns will alter.
2. Profit taxes may vary by the amount of profit made.
3. Businesses in areas of low unemployment may receive subsidies or grants.
4. Certain industries may get subsidies (e.g. renewable energy suppliers) or have to
pay more taxes (e.g. fossil fuel businesses).
5. Groups Who gain or rose will have certain spending characteristics and these will
affect businesses in those areas.

SOCIAL INFLUENCES:
Corporate social responsibility (CSR):
Is the voluntary action needed for an organisation to act responsibly to all its
stakeholders. CSR includes acting in an ethical way, respecting the people,
communities and the environment that the business affects, and balancing the claims
of stakeholders. Acting on CSR might:

1. reduce environmental problems such as pollution and climate change

2. mean long-term needs are put ahead of short term goals
3. be behaving in the right way
4. reduce exploitation of one group by another - for example, profits for
5. shareholders mean very low wages or employees
6. lead to commercial benefits

CSR includes:
Accurate accounting procedures that reflects the true value of assets and cash flows

1. not paying incentives (bribes) to win contracts

2. paying a fair wage and providing healthy and safe working conditions
3. buying raw materials from sustainable sources
4. acting to reduce pollution beyond the legal requirements
5. making suppli ers conform co an ethiGil code of conduct
6. not outsourcing to poorly paid or child workers or where low health andsafety
standards operate
7. a social audit or CSR report of stakeholder Objectives, establishing CSR indicators,
measuring these and regularly reporting on them

For CSR:

1. Better financial performance as customers are attracted and costs are looked
at carefully.
2. Can be a marketing advantage in brand image and reputation.
3. Lower costs - for example, recycling or reducing waste.
4. customer loyalty.

Against CSR:

1. Expensive and raises costs and prices.

2. May make businesses uncompetitive, especially in a global marketplace.
3. Stakeholders cannot agree on ethical/socially responsible behaviour.
4. A luxury in a time of recession.
5. lt is a fashionable, cynical way to market a business.

The need to consider the community and pressure groups

Businesses operate in, a society that may be affected by business activity. Society is a
stakeholder and increasingly acting as an influence on business decision making.
Businesses are not separate from social change and have to take account of social
needs including

1. The changing role of women

2. environmental issues
3. sustainability and energy concerns
4. ideas of fairness and equality
5. perceptions about wealth and income distribution

Many of these needs are reflected and articulated by pressure groups such as
Greenpeace, Oxfam, and trade unions. These groups gain publicity in the media that
both reflects and affects consumers buying behaviour. It may be in the interests of a
business to engage with pressure groups and work with them to change so that social
needs and attitudes are reflected better. Failure to engage may lead to the government
forcing change by passing laws following lobbying by pressure groups. Examples might
include the pressure for:

1. more women to enter the workforce

2. a higher percentage of women to become senior managers
3. more environmentally friendly processes of production
4. Failure to respond may lead to fewer sales and less profit, lowered employee
motivation; difficulty in recruitment poor public relations and internal
conflicts.
Many businesses are finding that having an ethica1l approach or engaging in corporate
sociaI responsibility has a positive effect on sales, consumer perception and their
employees, and they use this as a marketing tool – for example, line caught tuna fish
are solid as a sustainable catch and fair trade products appeal to an 1increasing
number of consumers in richer countries.

TECHNOLOGICAL FACTORS AFFECTING BUSINESS

Technology is used extensively in modern business, from production to product selling
and customer support. Technology allows a company to save time and labour costs
while achieving more efficiency, which, in the long run, can result in a competitive
advantage.

Three key areas of technology in business are automation, e-commerce, and digital
media.
Automation: is the use of robots to perform repetitive tasks formerly done by
humans.
Automation is applied throughout the supply chain of many industries, including
electronics manufacturing, automotive, retail, online services, banks, etc.
The manufacturing of cars and trucks is carried out by big, automated robots instead of
human workers. These robots can perform a wide range of tasks including welding,
assembling, and painting. With automation, production becomes safer, more efficient
and more accurate. Companies can hire fewer workers for menial work and focus more
on quality-improving activities.

E-commerce is the buying and selling of goods and services on the internet.
Many companies set up an e-commerce shop to accompany their brick-and-mortar
stores, while others operate 100% online.

Some examples of e-commerce include:

1. An online bookstore
2. Buying and selling through Amazon or eBay
3. An online retailer.

The key incentive for businesses to move online is to reduce fixed costs. While physical
businesses have to pay healthy monthly fees for rent, warehousing, and electricity on-
site, an online business pays little to no fixed costs.

For example, an Etsy shop selling cooking recipes and printables can avoid costs of
warehousing, hiring workers to work on-site, and renting out a location. Without the
burden of fixed costs, the business owner can focus more on product development and
promotion.

Finally, there is the extensive use of digital media.

Digital media are online channels that get businesses in contact with their customers.
Some examples include websites, blogs, videos, Google ads, Facebook ads, emails,
social media, etc.

While traditional marketing methods like billboards and banners are restricted to local
areas, online channels allow companies to communicate their marketing messages
across the globe in a matter of seconds.
DEMOGRAPHIC INFLUENCE:
Demography ,is the study of population structure and fts changes. lt is concerned with
age, gender1 ethnic origin, migration and education l1evels. It deals with how birth
and death races and migration affect these. Demography is vital to business activity
because it is related to patterns of demand and employment.

Demand and Demography: People with different characteristics; such as age or

gender; have different demands for products - men and women buy different types of
clothes and read different types of books.

Age:
A society w, with increasing percentages of older people, will:
1. spend relatively more on holidays and travel, health products and eating out
2. need more care homes and medical services but spend less on music,
electronic goods and entertainment
3. require govern1ments to pay more pensions, so taxes may rise
A society with a high percentage of people aged under 15 will have
1. relatively high demand for toys, baby food and children’s clothes
2. face increasing demand over time for products appealing to young adults
then families
Changing ethics Mix: A more ethnically diverse population will demand a wider range
of clothing, food and possibly religion-related products.
The demographics in a particular country will affect the opportunities for
business activity - some firms will find their products in a declining ,market
some in a growing market.

Employment and demography:

Age:
1. Older workers tend to be loyal to the employer, have experience, are less
likely to move jobs or location, and are possibly y more reliable and less likely to be
absent.
2. Younger workers tend to cost less are likely to be flexible, willing to move
and able to learn new skills, but may need more family/parenting leave .
Education Levels:
A society with a low percentage of people with school or university qualifications
will have a low-skilled, inflexible workforce that forces employers to offer training
programs.

Ethnic Mix & Migration:

 Different ethnic groups may have different expectations regarding facilities at
work, or working hours.
 Immigrants may have different skills or be wil1ing to work for lower wages.

1. State two reasons why governments have passed laws that affect business
behaviour.

To, protect workers' health and safety to encourage Competition, to ensure

consumers are gjven accurate information

2. Identify two areas of business activity that are affected by law.

Employees' working conditions; advertising claims; ·mergers and takeovers.

3. Identify and define three key government macroeconomic objectives.

Low jnflation - a small rise in prices over time.
Stable exchange rate - a constant value for the price of the currency.
Low interest rates - keeping the price of borrowing money low.
increasing employment to a greater number of people with paid work.

4. Define inflation.: Inflation is a persistent rise in the average level of prices

5. Explain economic growth: Economic growth is an increase in the total value of a

country's output. normally measured by gross domestic produce (GDP).

6. If exchange rates rise, state

the effect on the prices of imports - Prices of imports fall
the effect on the prices of exports - Prices of exports rise.

7. Outline two reasons why a government might wish to transfer wealth from one
group In the country to another. To help poorer families afford basic goods and
services; to help high technology industries start and grow
8. For each Of your two reasons gjve an example of how two specific groups might
be affected.
To help poorer families afford basic goods and services; to help high1 technology
industries start and grow

9. 9. A country is facing high unemployment; low growth, low inflation and a stable
currency.
(a) Identify two appropriate macroeconomic objectives for the government.
(b) Outline two policies a government may adopt to achi1eve these objectives.
(a) Raising employment; lower price rises.
(b) Monetary policy e.g. lowering interest rates to make borrowing costs lower so more
equipment and thus jobs are provided; fiscal policy, e.g. lowering income tax to
provide more incentive to work and more consumer
spending.

Explain the meaning of corporate social responsibility.

Corporate social responsibility is the voluntary actions needed for an organisation to
act responsibly to all its stakeholders

Identify three stakeholders in a business manufacturing shoes, including at least one

external to the business..
Employees, shareholders, customers (external), government( external).

Give one reason why it might be difficult for a business in a developing country to act
in a socially responsible way.
CSR can be very expensive and a large increase 1n costs may not be possible. This is
especially true if the business gets orders from foreign firms because it is cheap

Remember that the decrease in inflation means that prices are rising less
quickly, not that they are falling.

Past papers:

Topic 1.4 external influences on business activity

1. March 18/P32/Q1 Case Study no 53 (All natural Products (AP) The

government of country X has decided to end international trading
agreement with neighboring countries. (Lines 15-16). [10]
Knowledge/definitions
• International trading areas – agreements such as free trade
• Economic slowdown – decrease in economic growth, rising
unemployment, currency depreciation
Benefits
• Depreciating currency – exports will be more competitive
• Slowdown – wage rates in country X will grow more slowly
• country X interest rates are likely to stay low
Limitations
• All imported materials will be more expensive,
• country X consumers will have less disposable incomes,
• Will AP need to increase prices?
• Costs of all overseas projects will increase
• General disadvantages around uncertainty, such as banks’ attitude
towards lending and investor nervousness.
Application
• Reference to data in Table 1, e.g. may be able to trade more freely with USA and Asia
• Imported products, including processed raw materials such as hair and beauty ingredients from
overseas will be more expensive.
• Falling country X incomes but are cosmetic products luxuries? Some may see as necessities.
• Cost of new factory, further growth options will increase
Analysis
• New trade agreements could increase sales and market share in other countries/greater
awareness
• Slowdown in Country X will weaken market conditions and sales but this could be offset by better
sales elsewhere due to competitive prices
• Could this affect the decision to relocate more production overseas?
• Higher cost of raw materials could feed through into price rises

2. March 18/P32/Q2 (b) Case Study no 53 (All natural Products (AP) Refer to your
result to part (a) and other information from the case. Recommend to AP’s
shareholders whether they should sell their shares in the company. [6]

Knowledge/definitions
• Shareholders as owners of the plc are interested in share prices and return on shares, so dividend
yield is important
Application
• Use of figures/ratios calculated from the data, e.g. change in profit margin
• Detail of possible expansion plans into men’s products/salons in hotels Reasons to sell shares
• Share price is predicted to fall, sell before it falls further?
• Dividend yield is predicted to fall (but not significantly)
• Shareholder nervousness about future of company
• Recent fall in profit and dividends Reasons to keep shares
• Profit margin is forecast to increase (10.2% to 10.3%)
• Interest rates still low so worse returns from banks
• Company expansion plans announced at AGM may be promising
• Strong track record of increasing dividend
• Commitment to CSR could be important to some investors
3. M/J 17/P31/Q5 Case Study no 48 (Tango Travel Company (TTC) Evaluate the extent
to ethics should influence the activities of TTC. [16]

Knowledge:
• Definition: Ethics/ethical behaviour – basing (business) decision on a moral code of conduct. ‘Doing the
right thing’
• Benefits/costs of ethical behaviour Application:
• Examples of indications of unethical behaviour: Zero hours contracts – not illegal but very insecure for
employees • Decision to delay payment to suppliers to improve cash flow
• Competitive industry – will ethical behaviour risk future of TTC?
• Saving costs by not repatriating tourists quickly in event of danger.
Analysis:
• Suppliers might refuse to supply or offer less good service if they are going to be paid after long delays –
but TTC is a big business so is TTC just using its muscle to exploit suppliers?
• Benefits of improved cash flow to TTC
• Potential negative impacts – low worker motivation and problems in recruiting workers – unless
unemployment is high, and is this just a way of exploiting their position?
Evaluation:
• Flexibility, reduced costs, squeezing suppliers – these might be ‘normal tactics’ in this industry and these,
and other potentially unethical practices, might be only way that TTC can carry out its ‘low cost strategy’ to
give a competitive advantage
• Putting tourists in unnecessary danger by not having an effective contingency plan could lead to publicity
disaster if TTC travellers are injured.
• Balance of pros and cons to come to an overall conclusion

4. O/N 16/P32/Q3 Case Study no 43 (Marco Fishing Incorporated (MFI) Discuss the
likely impact on MFI of the change to the external legal and economic environment in
country X. [14]

5. O/N 16/P31/Q1 Case Study no 44 (Kaldi & Akbar’s (KA)Analyze the benefits to KA of
publishing a social audit. [10]

6. M/J 16/P33/Q5 Case Study no 42 (Xiang Mobile (XM) Discuss the extent to which
external factors, such as those shown in appendix C, could influence the future success
of XM. [10]

7. O/N 15/P31/Q1 Case Study no 38 (BAS) Analyze the benefits of corporate social
responsibility (CSR) TO BAS. [10]

8. M/J 15/P32/Q5 Case Study no 34 (Mbella Farms (MF) Discuss whether MF should
always consider the interest of stakeholders as more important than profit’ (line 11).
[14]

9. M/J 15/P31/Q4 Case Study no 35 (Chan Chicken Farms (CCF)

Discuss the importance to CCF of corporate social responsibility when aiming to
maximize shareholder value. [16]

10. M/J 15/P33/Q5 Case Study no 36 (Lemonfizz (LF) Discuss the extent to which LF
should consider corporate social responsibility in its decision making. [16]
11. O/N/14/P31/Q1 Case Study no 32 (Active Fitness (AF) Discuss importance to AF of
investing in the development of good customer relations. [12]

12. M/J 14/P32/Q5 Case Study no 28 (Global Construction (GC) Analyses how the
government policies to cut the rate of inflation are likely to affect GC. [10]

13. M/J 14/P32/Q5 Case Study no 28 (Global Construction (GC) Discuss whether GC
should be more accountable to its stakeholders by reporting on its CSR activities in its
annual report. [16]

14. M/J 14/P31/Q1 Case Study no 29 (Ramos Sugar Corporation (RSC) Analyze the
likely benefits to RSC of operating ethically towards its stakeholders. [10]
15. M/J 14/P31/Q3 Case Study no 29 (Ramos Sugar Corporation (RSC) Discuss the
likely impact on employee efficiency of increased use of technology in the sugar
production division [16]

16. O/N 11/P3/Q1 Case Study no 13 (Atlantic Steel Company (ASC) Analyze the
opportunities and threats of a global recession. [10]

17. M/J 11/P31/Q5 Case Study no 11 (Asia Clothing (AC) Assess the importance of
AC’s corporate social responsibility (CSR) policy to the company’s future success.
[14]

18. O/N 10/P32, 31/Q6 Case Study no 8 (Radar Cosmetics) Discuss the extent to which
the data in appendix A and other external factors could influence the future success of
radar. [20]

19. O/N 10/P33/Q6 Case Study no 9 (S and I Bus Company (SIBCO) Evaluate the
extent to which governments should try to control the operations of businesses such as
SIBCO. [20]

20. O/N 09/P32/Q6 Case Study no 4 (Chan Beauty Company (CBC) Discuss whether
the future success of the company will depend more on June’s management skills or on
external factors outside of the company’s control.
[20]

21. M/J 09/ P03/Q1 Case Study no 3 (Car Manufacturer at a Crossroads) Assume
eastern motors have a factory in your country. Analyze the impact of any two legal
controls on his factory’s operations.[8]

22. O/N 08/P03/Q6 Case Study no 2 (Tanroh’s Dilemma)Discuss whether the

government should support and protect important industries in your country.
[20]

23. M/J 08/P03/Q7 Case Study no 1 (Pyramid Televisions (PT) Evaluate what you
consider to be the most important internal and external factors that could determine
the success of PT over the next five year. [20]
ROLE OF TECHNOLOGY

In the past decade, technology has grown exponentially and has affected our
everyday way of life and impacted almost every industry, including
international business. Technology is ultimately what makes thriving
international trade and businesses possible, and without technology,
international business would be slow, tedious and time-consuming.

Technology is no longer reserved for specific countries or certain groups of people.

These days, even the average person has access to some form of technology, which
has aided the technological and international business revolution.

In this article, we look at some of the ways in which technology affects international
business and what we can expect as technology and innovation continue to grow and
expand.

Telecommunications

Not so long ago, there was a time where writing letters was the only way to
communicate with your international business connections. These letters could take
days, weeks, and even months to reach their destination. But now, look at where
technology has gotten us! We’re able to send messages and emails instantly and
interact through platforms like Skype and Zoom.

Telecommunications technology is what makes running an international business

doable. It’s necessary for sending invoices, dealing with customers, communicating
with suppliers, and keeping in touch with employees that may live in other parts of the
world.

Social media

It could be said that social media is a branch of telecommunications, but it deserves

attention of its own as social media has given international business a platform from
which it can skyrocket. Social media keeps tabs on global trends in fashion, decor, art,
furniture, and a wide variety of other products, which provides international businesses
with impressive insight.

Whether it be Instagram, Facebook, Linked In, or others, having a social media

account allows international businesses to connect with their target audience worldwide
and advertise their products to them. Where once people would not be exposed to
businesses from other countries, social media has made it easier than ever to stumble
upon businesses from all over the world.

Transportation

There have been several major advances in transportation in the last 80 years or so.
No one wants to wait months for their international order anymore; that’s because
commercial jet craft has made transporting products to different areas of the globe
affordable and timely. Customers these days are all about instant gratification, so
there is a major emphasis on getting orders shipped as quickly as possible.
The explosion in air travel and airports worldwide has also made travelling for business
people more accessible and created a huge rise in the travel industry, creating
opportunities for many international businesses.

Production

If you’re an international business that sells products, you would have directly
benefited from the latest innovations in production. Technology has played a major role
in the production processes we know today and associated processes such as
production planning, financial planning, and marketing. Thanks to technology,
companies may have production and manufacturing plants in several different
countries, and you can choose where to create your manufacturing plant based on
where materials are easily sourced and where skilled labour is affordable.

Market globalisation

Market globalisation began forming its roots when it became more affordable and
feasible to transport and sell goods in different countries. The internet is seen as a low-
cost market globalisation network in an electronic form. Because of social media,
television, and the low costs involved in transporting products around the world, there
has become a sort of convergence in consumer preferences and tastes. For instance,
there was once a time when only Americans wore jeans, but now people worldwide are
interested in buying and wearing jeans, and that is how market globalisation works.
The same thing goes for brands such as McDonald’s, Pizza Hut etc.

A global culture is created in which different countries begin having similar lists of
wants and demands.

eCommerce

eCommerce platforms are platforms or websites that specialise in selling products

online, usually to an international audience. Over the years, we have seen many
advances in eCommerce technology. As a result, we are at a point where almost
anyone can make their own eCommerce site with very little trouble, thanks to all of the
templates and applications out there. This gives the average person, as well as multi-
million dollar corporations, the opportunity to have their goods online and available to
be sold.

eCommerce platforms are usually fully integrated with shipping, payment, customer
service, etc.

Online banking

Pay instantly with the click of a button! Technology has played a significant role in
online banking, and we have seen tremendous growth in just the past few years.
Paying online, no matter where you’re located in the world has truly become easier
than ever before, and there are so many options available to you! You can use your
credit card, payment solutions such as the popular Paypal, as well as digital currencies
like Bitcoin in some instances. In addition, exchange rates and payment fees have
become lower, making shopping internationally easy and affordable.
Whether you’re a customer buying a pair of shoes online or an international business
owner who needs to pay his suppliers and employees, online banking and payment
services have made payments exceptionally convenient.

Technology plays a major role in the security behind all online transactions.

The future of international business

Technology is always evolving, and things in the international business landscape won’t
ever stay the same for very long. While it is always impossible to predict the future
exactly, as business experts, we expect to see trends in international business leaning
more towards services than products, the inclusion of digital currencies as forms of
payment, and an emphasis on eco-friendliness and transparency.

If you’re interested in getting involved in international business, remember that

technology is your friend. The more you understand technology, the better you can use
it to your business’s advantage.

Chapter 7.External economic influences on Business Activity

Def. Macro economics

The study of entire economy like economic output, inflation, interest rates, or
governments policies, rather than individual markets.

What do the macro-economics objectives consider?

 Economic growth (GDP)
 Inflation
 Unemployment
 Balance of payments
 Exchange rate stability
 Transfer of wealth
Def. GDP
Gross Domestic Product is the total value of goods and services produced in a country
in one year - real GDP has been adjusted for inflation.

Def. Economic growth

An increase in a country’s productive potential measured by an increase in tis real GDP.

Why is economic growth important to countries? (5)

 Increased number of quality goods and services for consumers -> higher living
standards
 Increased employment due to higher levels of output, higher consumer income.
 More resources for health and education
 Reduction of absolute poverty
 Higher taxes -> higher income for the government.

Def. Business investment

Expenditure by businesses on capital equipment, new technology and research and

development.

What are the factors that lead to economic growth?

 Increase in output resulting from technological changes and expansion of
industrial capacity
 Increase in economic resources, such as higher working population or discovery
of new resources of oil and gas.
 Increase in productivity

Def. The business cycle

The regular swings in economic activity, measured by real GDP, that occur in most
economies, varying from boom conditions to recession when total national output
declines.

What are the four key stages of the business cycle?

 Boom
 Recession
 Slump
 Growth/ Recovery
Explain what happens during the boom period. (3)
 Boom - A period of very fast economic growth with rising incomes and profits.
 Inflation is then caused due to high demand for goods and services -> higher
prices -> higher wages are demanded -> higher costs. This causes the
recession.
 Governments/central banks increase interests rates to reduce inflationary
pressure.
Explain what happens during the recession period. (4)
 Recession - A period of declining real GDP. Effect of failing demand and higher
interests rates makes the GDP growth slow down.
 Incomes and consumer demand falls -> lower profits.
 Higher unemployment because lower demand -> less workers needed.
 Government tax revenue falls
Explain what happens during the slump period. (2)
Slump - A prolonged recession causes a slump where real GDP falls substantially and
prices fall.

This occurs if the government fails to take corrective economic action.

Explain what happens during the recovery period. (2)

 Recovery/Growth is eventually achieved when real GDP starts to increase again.
 This may be because corrective government action takes effect, or rate of
inflation falls => the country’s products become competitive and demand starts
to increase.

Def. Inflation

An increase in the average price level of goods and services. It results from a fall in the
value of money.

Def. Deflation

A fall in average price level of goods and services.

What causes inflation? (2)

 Cost-push causes of inflation: When business face higher costs, they raise prices
to keep profits.
 Demand-pull causes of inflation: When the demand rises, producers would raise
prices to increase profit margins.

The government and central bank policies to control inflation (3)

Cost push inflation:
• High exchange rate -> makes imports cheaper for the business -> less cost push
inflation
Demand pull inflation:
• High interest rates -> discourage consumers from borrowing and spending.
• Higher tax rates and reduction of government spending -> Reduces consumer
demand as consumers have less disposable income.

Benefits of inflation (if the rate is low) (2)

Value of debts owed by companies will fall because the value of money is falling -> so
when they are repaid, they are rapid with money of less value.

Rising prices means that the value of land and fixed assets is higher -> increases the
value of business.

Drawbacks of inflation (at high rates) (6)

 Higher wage demands
 Consumers would be more price sensitive
 Higher rates of interest
 Cash flow problems due to higher prices of raw materials etc.
 If inflation is lower in another country, it will lose competitiveness in overseas
markets.
 Reluctancy to sell with extended credits periods (because when repaid the value
of money is lower)
However is deflation beneficial? Effects of deflation
 Consumers delay buying because they’ll wait till the prices become even lower -
> lower demand -> falling profits.
 Business are less likely to borrow to invest because the amount borrowed would
be of higher value later on.
 Future of profitability of new projects would be doubtful.
Def. Unemployment
This exists when members of the working population are willing and able to work, but
are unable to find a job.

Def. Working population

All those in the population of working age who are willing and able to work.

What are the 3 main factors that cause unemployment?

 Cyclical unemployment
 Structural unemployment
 Frictional unemployment

Def. Cyclical unemployment

Unemployment resulting from low demand for goods and services in the economy
during a period of slow economic growth or a recession. Businesses would need less
employees, therefor unemployment rates go up.

Def. Structural unemployment

Unemployment cause by the structural decline in important industries, leading to
significant job losses in one sector of industry.

What are the possible causes of structural unemployment?

Structural unemployment is caused when there is a disparity between the
knowledge and skills that the employer demands offered by their employees. It is
usually generated due to several changes like recession, deindustrialization, etc. As a
result, individuals cannot work in the economy because of different skill requirements.

The most prominent reason for structural unemployment graph rising is the mismatch
of workers’ skills with the jobs available. The causes of structural unemployment
disparity of skills are as follows:

#1 – Geographic

There are places where the worker’s job skills match the jobs available, but these
places can be far from the worker’s geographical region, and the workers are not ready
to relocate to such areas.

#2 – Macro-Economic Changes

Older workers face these issues. They have worked in a certain skill with perfection.
But suddenly, the jobs related to that particular skill are found nowhere, and their skills
have become obsolete. Let us take the example of Dubai, which is known as an oil-rich
company. However, in today’s scenario, it becomes an economy that depends more on
tourism and logistics. Therefore, all the workers with expertise in oil drilling were
jobless, and the hotel had a shortage of workforce professionals and staff.
#3 – Wage Related

Wage-related is one of the causes of structural unemployment where workers often do

not accept the job because the package they offer is very little. However, such low
packages are an abundance of labor that is easily available at a low price.

What is the difference between frictional and structural unemployment?

Frictional unemployment refers to unemployment including people who keep
transitioning between jobs. It is voluntary and not related to the economic cycle. In
comparison, structural unemployment is the result of economic shifts. It also includes
the technology changes and the downturn in the industry.

What are the solutions to structural unemployment?

The solutions to structural unemployment are education and training that increases the
ability to find a job in a new industry—in addition, moving subsidies and discarding or
decreasing the unemployment advantages to get a suitable job soon.

What are the effects of structural unemployment?

Structural unemployment is a long-lasting situation that happens due to fundamental
economic changes. It is a crucial financial problem as it has a long-lasting effect
connected with challenges and tackling the issue. As a result, it can increase the
natural unemployment rate.

What is structural unemployment vs. cyclical unemployment?

Structural unemployment refers to unemployment that lasts for years. It happens due
to technological changes or a demographic shift. In comparison, cyclical unemployment
happens due to the decline of the economy. It is related to the changes in business
situations affecting worker demand.

Def. Frictional unemployment

Frictional unemployment is defined as the portion of total unemployment that
results from the normal turnover of labor, as workers move between jobs and
industries, seeking the best use of their skills and talents. It is a temporary and
voluntary form of unemployment that arises from the time delay between when an
individual starts looking for a new job and when they actually find one.

This type of unemployment is the most common and is usually short-term. It's also a
sign of a healthy economy rather than an unhealthy one and is part of natural
unemployment.

Natural unemployment is a hypothetical rate of unemployment suggesting that there

will never be zero unemployment in an economy that is operating well. It's the sum of
frictional and structural unemployment.

But why is unemployment considered to be a sign of a healthy economy? Well, a strong

and healthy economy would allow for people to switch jobs (if they so desire) without
fear that they will remain jobless because they cannot find a new or more suitable
position. While they will be jobless for a short period of time, they are confident that
there will be another job with comparable pay available for them.

Let's say Bob just graduated with a degree in computer science. Although there are
plenty of jobs available in his field, Bob doesn't get hired immediately upon graduation.
He spends a few months interviewing with different companies, trying to find the right
fit for his skills and interests. This period of job searching, where Bob is unemployed
but actively looking for work, is a classic example of frictional unemployment.

Frictional Unemployment Examples

 People who leave their current job to find a better one

 People who are entering the workforce for the first time
 People who are reentering the workforce

What Causes Frictional Unemployment?

Included below are the usual causes of frictional unemployment:

 An employee doesn't feel fulfilled at their current position and leaves to find a
new position
 An employee feels that if they switch jobs they would have better opportunities
 A person doesn't want to work full-time anymore and leaves to find a job with
fewer hours
 An employee is not happy with their current working conditions and leaves in
search of a new position
 A person leaves to take care of sick family members or are sick themselves
 An employee has to move for personal reasons
 An employee wants to go back to school and further their education

During times of economic instability, the rate of frictional unemployment decreases.

Employees fear they might not find another job so they remain at the one they're at
until the economy heals enough for them to leave.

Disadvantages of frictional unemployment

Frictional unemployment also has certain disadvantages that can impact individuals
and the economy as a whole. While it fosters job mobility and skill enhancement, it can
simultaneously lead to periods of financial instability for individuals and indicate a
mismatch between the available jobs and worker skills or expectations in the economy.

Disadvantages of frictional unemployment include financial hardship for individuals,

waste of resources in the economy, mismatch of skills can lead to structural
unemployment, increased burden to the state.

Financial hardship

While unemployment benefits can help, periods of joblessness can still lead to financial
hardship for many individuals, especially those with limited savings or high financial
obligations.

Waste of resources

From an economic perspective, having a section of the employable population not

contributing to production can be seen as a waste of potential resources.

Mismatch of skills

Frictional unemployment can indicate a mismatch between the skills workers possess
and the skills employers need. This can lead to longer periods of joblessness and could
potentially require retraining or education.

Increased burden on the state

The provision of unemployment benefits puts a financial strain on the state. If levels of
frictional unemployment are high, this could lead to increased taxes or cuts in other
areas of public spending.

In summary, while frictional unemployment has its advantages, it's also associated
with certain disadvantages, such as potential financial hardship for individuals, waste of
resources, skill mismatch, and increased burden on the state. Understanding these
disadvantages is critical to managing and minimizing the negative impacts of frictional
unemployment in an economy. It's a delicate balance, but with the right policies and
support, a healthy level of frictional unemployment can be maintained.

Discouraged Workers and Hidden Unemployment

Frictional unemployment can result in discouraged workers. Discouraged workers fall

under the umbrella of hidden unemployment, which is unemployment that is not
counted when calculating the unemployment rate.

Discouraged workers are people who have grown discouraged (hence the name) in
finding a job. They stop their search and are no longer considered part of the labor
force.

Benefits of Frictional Unemployment

Frictional unemployment, despite its label, isn't an entirely negative concept. It's an
inherent element of an ever-changing labor market where workers seek better
opportunities and employers search for the most suitable talent. This type of
unemployment is a natural part of a healthy, fluid economy and can offer several
benefits.

Furthermore, the state plays a crucial role in managing frictional unemployment. By

providing unemployment benefits, the state ensures that its citizens' minimum needs
are met during periods of unemployment. This safety net encourages workers to take
calculated risks in seeking better employment opportunities without fearing financial
ruin.

The advantages of frictional unemployment include opportunities for better job

matching, skill enhancement, and stimulation of economic dynamism.

Opportunity for better job matching

When workers voluntarily leave their jobs to find better opportunities, it enhances the
overall efficiency of the job market. They can find roles that better match their skills
and interests, leading to increased job satisfaction and productivity.

Skill enhancement

During periods of frictional unemployment, workers often take the opportunity to

upskill or reskill. This can lead to an overall increase in the skill level of the workforce.

Stimulates economic dynamism

Frictional unemployment can indicate a dynamic economy where workers feel confident
in leaving their jobs to seek better opportunities. This dynamism can lead to innovation
and growth.
In conclusion, frictional unemployment is a complex component of any economic
system. While it can present challenges, it also offers significant benefits, including
better job matching, skill enhancement, economic dynamism, and government support.
It's important to remember that a certain level of frictional unemployment is necessary
and beneficial for a healthy, evolving economy.

Frictional unemployment theories

Frictional unemployment theories generally focus on a few ways to "control" frictional
unemployment, but the reality is that these would simply influence more people to find
jobs quicker instead of spending as much time as they currently do staying
unemployed. This would mean they're still frictionally unemployed, but for a shorter
period of time. Let's explore some of the ways this can be controlled:

Frictional Unemployment: Reduce unemployment benefits

If a person decides to apply for unemployment, they will be collecting benefits as long
as they don't have a job. For some, this might encourage them to take their time
finding a new job since they have incoming funds. A way to shorten the time spent
being in between jobs would be to reduce the unemployment benefits given. This could
instead encourage people to find a new position faster since their income is reduced.
However, a downside to this could be that in the rush to find a new position, they end
up taking any job, even if it's one they're overqualified for. This would just add more
people to the hidden employment group and is probably not the best course of action.

Frictional Unemployment: More job flexibility

Some of the reasons that people leave their jobs are because of better opportunities,
relocation, or the hours that they want to work not being available. By being more
flexible and offering options such as training courses for advancements, remote work,
and the option to work part-time, the need for workers to have to leave their current
positions would decrease.

Frictional Unemployment: Social networking

Sometimes, the reason that a job isn't getting filled by an eligible worker is simply that
the eligible worker is not aware that the job is available! Employers that post their jobs
on job boards or online, for example, will fill a position quicker since the information
regarding an open position was more accessible. People can't apply for positions if they
aren't aware an employer is looking to get them filled.

Frictional Unemployment - Key takeaways

 Frictional unemployment occurs when individuals voluntarily choose to

leave their job in search of a new one or when new workers enter the job
market
  When the economy is doing poorly, the rate of frictional unemployment
decreases

 Frictional unemployment is the most common and is seen as a sign of a

healthy economy

 People who are between jobs, entering the workforce, or reentering the
workforce are all frictionally unemployed

 Hidden unemployment is unemployment that is not counted when

calculating the unemployment rate

 Lower unemployment benefits, more work flexibility, and social

networking are ways to decrease the frictional unemployment rate

 The frictional unemployment rate can be calculated by dividing the

number of frictionally unemployed people by the total labor force
What is frictional unemployment?
Frictional unemployment is when people leave their current job to find a new one or are
seeking their first-ever job.
What is an example of frictional unemployment?
An example of frictional unemployment would be a recent college graduate searching for a
job so they can enter the workforce.
How can the rate of frictional unemployment be controlled?

It can be controlled by lowering unemployment benefits, allowing for more flexibility at

work, and social networking to inform possible applicants of new job openings.
What are some causes of frictional unemployment?
Some causes of frictional unemployment include:

 Not feeling fulfilled at a current position

 Better opportunities elsewhere
 Wanting more/fewer hours than current job is willing to provide
 Leaving to take care of sick family members
 Moving away
  Going back to school
How does frictional unemployment affect the economy?
Short-term, frictional unemployment is usually a sign of a healthy economy! It allows people
to change jobs without fear that they will remain jobless, and so they find jobs better suited for
them and leave their old position to get filled by another. It also allows employers to gain
more qualified employees for the positions that are open.
What are some frictional unemployment examples?
Frictional unemployment examples include:

 People who leave their current job to find a better one

 People who are entering the workforce for the first time
 People who are reentering the workforce
What Is Cyclical Unemployment?
Cyclical unemployment is one of the types of unemployment, which
usually happens during the contraction phase of the business cycle where
the unemployment rate starts rising as businesses start laying off their
employees during the recession period & unemployment rate decreases
during the expansionary phase of the business cycle.

Thus, it occurs during negative economic growth periods for at least two
consecutive quarters. Business wants to compensate for the loss due to
an extra supply of goods and services and a fall in demand. There are
many ways and tools to recover from the same and reduce the negative
effect as far as possible.
Causes
Cyclical unemployment rate is directly related to macro-economic
factors in an economy as the unemployment rate moves along with the
business cycle phases. Usually, the business cycle has four phases, i.e.,
trough, expansion, peak, and contraction, which define the fluctuation in
demand or production activity in an economy measured by a growth rate
of real gross domestic product (GDP).
Cyclical Vs Frictional Vs Structural Unemployment
Cyclical unemployment is caused due to economic changes, whereas
frictional unemployment is caused due to time gap in changing jobs and
structural unemployment is due to shift in economy. However, let us look
at their differences.

What is the difference between cyclical and seasonal unemployment rates?

Basically, the cycles depending on the seasons are called seasonal.
Cyclical refers to cycles based on the economy’s and naturally occurring
business cycles.
What is an important example of cyclical unemployment from the past?
Construction workers being laid off during the 2008 financial crisis-
induced Great Recession is an example of cyclical unemployment. In
addition, the construction of new homes declined sharply due to the
faltering housing market, which increased the cyclical unemployment rate
for construction employees.
What are considered to be as cyclical industries?
Industries such as construction, semiconductors, airline, steel, textiles,
etc., are considered industries with a higher chance of experiencing
cyclical unemployment.
What is cyclical demand?
Cyclic demand, as opposed to cyclical unemployment, varies regularly
throughout time depending on the state of the economy, the season, etc.
There is a cyclical need for many businesses in the manufacturing
engineering sector.
#1 – Cyclical unemployment
It relates to the cyclical trends in the business cycle. They are classified as
medium-term in nature (1-12months). When there is no productivity in
business, consumer demand falls, and, as a result, labor demand also
falls. The rise in cyclical unemployment means the economy shows
signs of a slowdown. Conversely, unemployment rates will be at their
lowest when the economy is doing well. This is directly related to
the macroeconomic situation of the countries. When productivity is low,
and people are competing for job opportunities, they receive less money,
which would lower inflation. Policies that stimulate demand
and expansionary monetary policies are a way out of this situation.
#2 – Frictional unemployment
It happens when a person shift from their current job to another or
transition into labor. When people leave employment for better
opportunities or personal reasons, they may not find the next job
immediately. Businesses may also take time to search for suitable
candidates. The supply and demand do not meet in such situations,
resulting in frictional unemployment. This is something that happens
for short time span. However, they can occur at all times of a business
cycle.
#3 – Structural unemployment
It occurs when there is a mismatch between what people expect and the
available jobs. It may be because the individual is overqualified for the
job or underqualified. Individuals may not possess the necessary skills for
the job they desire, or the job available is below their qualifications,
experience, or pay. Structural unemployment is long-lasting (more than
12 months) as it may take years to develop the necessary skills and
expertise. It can exist even when economic conditions are good.
#4 – Underemployment
This occurs when people have jobs but cannot utilize their skills properly
and work less hours. They may be part-time or full-time workers who
could be qualified for better hours and more pay, but cannot find any.

#5 – Hidden unemployment
Hidden unemployment occurs when people do not belong to a labor
market statistics but are willing to work if they had a chance. For example,
people may have given up searching for jobs because they couldn’t fit for
any. As a result, they would have given up hope and left searching for
jobs. However, if given a chance, they would work.

#6 – Seasonal unemployment
They are seasonal and occur during the off-seasons. For example, in
agriculture, people can go jobless after the harvest. In tourism, tour
guides may be jobless as the tourist activity drops after the peak season.

How does unemployment affect the economy?

It can lead a section of people to poverty, reduce the economy’s output,
and, therefore, revenue through income and taxes go down. This puts
pressure on government resources, increases crime rates, and causes
conflicts. In addition, it can tarnish the image of a country.
What are the economic costs of high unemployment?
 1. Lost Output: High unemployment results in a loss of potential output, as
unemployed workers are not able to contribute to the economy. The
economy is operating well within their production possibility frontier.
2. Decreased Consumer Spending: Unemployed workers have less real
disposable income, which can result in decreased consumer spending and
a reduction in aggregate demand. This in turn can cause a fall in planned
investment spending by firms increasing the risk of a deeper recession.
3. Reduced Tax Revenue: High unemployment can also reduce direct and
indirect tax revenue, as fewer workers are paying into the system and more
are receiving unemployment benefits.
4. Increased Government Spending: High unemployment can increase
government spending on social welfare programmes, which then leads to a
rise in the size of a government's budget deficit and a higher level of
national debt.
5. Reduced Investment: High unemployment can reduce investment, as
firms may be less confident in the future prospects of the economy and
may not be willing to invest in new projects or expand their operations.
6. Lower Labour Force Participation: High unemployment can lead to
discouragement, where workers drop out of the labour force and may not
return, reducing the size of the potential labour force and the economy's
long run productive capacity. This is known as labour market hysteresis.
7. Increased Relative Poverty: High unemployment can result in increased
poverty, as unemployed workers are unable to meet their basic needs and
may require government support.

Overall, high unemployment can result in significant economic costs, including

lost output, decreased consumer spending, reduced tax revenue, increased
government spending, reduced investment, lower labor force participation, and
increased poverty.

Balance Of Payment :

Definition The balance of payments of a country is a systematic record of all economic transactions between
the residents of a country and the rest of the world. It presents a classified record of all receipts on account
of goods exported, services rendered and capital received by residents and payments made by them on
account of goods imported and services received from the capital transferred to non-residents or foreigners.

Def. Imports
An import is a good or service that is manufactured in a foreign country and
sold in the domestic market.

Def Export
An export is a good or service that is manufactured domestically and sold in
foreign markets.
What Is Macroeconomic Policy?

Macroeconomic policy refers to the government’s actions to regulate a

nation’s economic operations that support robust and sustained economic
growth, which is essential for raising living standards, creating jobs, and
creating wealth. The three primary macroeconomic concerns are national
production, unemployment, and inflation. These are components that can
be modified with the use of macroeconomic policies.

Macroeconomic Policy Explained

Macroeconomic policy is a tool that policymakers use to assist them in
regulating an economy. The functioning of the economy as a whole is
what macroeconomic policy analyses and attempts to influence.
Generally, the macroeconomic policy aims to create a stable economic
environment that promotes robust and sustained economic growth. This
growth is necessary to produce jobs, accumulate wealth, and enhance
living standards. The fiscal policy, the monetary policy, and the exchange
rate policy are the three most important pillars of macroeconomic policy.

The field of macroeconomics examines economic decision-making on a

more expansive scale, such as that of an entire area, country, or world. As
a consequence of this, governments all over the world make use of
macroeconomic policies to attain a balanced performance from their
economies. Policies about macroeconomics are the instruments that
assist policymakers in regulating an economy. Monetary policy and
fiscal policy comprise the two primary subsets included in it.
Objectives of Macroeconomic Policy
Many other goals, including political, social, and economic ones, are on
the list of things that governments strive to accomplish. It is typical for a
government to formulate policies to achieve these goals. This gets us to
the concept of a “goal of policy.”

The following are some examples of the aims of macroeconomic policy:

 First, reach exceptionally high levels of economic expansion.

 Second, keep unemployment at historically low levels.
 Third, get price stability under control.
 Fourth, keeps the balance of payments in a good position.
Types
The following are the types of macroeconomic policies.

#1 – Fiscal Policy
Changes in the total amount and composition of government spending,
the total amount and types of taxes collected, and the total amount and
nature of government borrowing are all examples of how fiscal policy
may be implemented.

In addition, directly affecting business activity using regular and capital

expenditures and passively through the impacts of expenditures, taxes,
and levies on private consumption, investment, and net exports are also
viable options for governments seeking to exert influence over economic
activity. However, under the existing framework of institutional structures,
the only aspect of macroeconomic policy directly under the government’s
authority is fiscal policy.

Fiscal policy can reflect either the discretionary acts of the government or
the effect of the so-called “automatic stabilizers” when used as an
instrument for reducing volatility in economic activity. One example of a
discretionary measure taken by the government to promote aggregate
demand is a fiscal stimulus package, which typically consists of increased
public expenditure and reduced tax rates.
#2 – Monetary policy
By altering the availability or price of money, i.e., the rate of interest in an
economy, monetary policy works to stabilize aggregate demand in the
economy. This is done to achieve full employment. It is possible to
describe the monetary policy as a policy that uses the central
bank’s ability to manage the money supply as a tool to attain the
central bank’s macroeconomic aims.

Decisions on monetary policy are implemented by adjusting various cash

rates (the interest rate on overnight loans in the money market). The
cash rate is settled on the money market due to the competition
between supply and demand for overnight funds. The government can
target the cash rate through open market operations, which involves
either boosting or lowering the number of funds banks employ to settle
transactions among themselves.

Examples
Let us have a look at the following examples to understand the concept
better.

Example #1
An article by the International Monetary Fund illustrates the connection
between macroeconomic policy and poverty alleviation. In it, it is stated
that the impact of growth on the income of the poor was, on average, the
same in developing countries as in rich countries and that the poverty–
growth connection had not shifted in recent years.

That policy-induced growth was just as beneficial for the poor as it was
for the public. It emphasizes that to enhance macroeconomic stability,
nations ought to encourage macroeconomic policy with policy
transformation that enhances and boosts the performance of these
markets and sectors. This is something that needs to be done for
countries to be able to enhance macroeconomic stability.

Example #2
Economic policies, namely fiscal and monetary policy, affect investors. To
keep an expanding economy’s long-term supply and demand dynamics
in balance, monetary and fiscal policies will frequently result in short-term
implications to various asset classes and the financial markets, affecting
investors. In addition, because of low-interest rates, investors are
encouraged to retain more cash and assets equal to cash.

Issues (Challenges)
Following are the challenges that are faced during the framing of
macroeconomic policies.

#1 – Unemployment
Involuntary inactivity of resources, such as personnel, is referred to when
discussing unemployment. If this issue persists, society’s gross national
product (GNP) will come in lower than it can produce. Therefore, one of
the government policy goals is to guarantee that there is no involuntary
unemployment of any kind, which means that full employment is one of
the aims. The difficulty is expanding the economy from one era to the
next so that unemployment rates remain relatively low.

#2 – Inflation
Inflation refers to a circumstance in which the prices of goods and
the factors of production are constantly going up. On the other
hand, deflation is the term used to describe the reverse of inflation. As a
result, some people end up ahead, but the vast majority need to catch
up. This results in a shift in the typical pattern of how money is
distributed. As a result, maintaining price level stability— ensuring neither
inflation nor deflation—is one of the government policy goals.

#3 – GDP
Output, the most significant notion in macroeconomics, refers to the
entire quantity of goods and services a nation generates. It is generally
referred to as the gross domestic product (GDP). However, this number
may represent the state of the economy at a certain instant in time.
Macroeconomists typically use real GDP, which takes inflation into
account. This is in contrast to nominal GDP, which only represents price
increases. Because an increase in inflation from one year to the next
results in a larger nominal GDP number. However, this does not
necessarily indicate that output levels are greater; rather, it merely
indicates higher prices.

Importance
 It contributes to the accomplishment of the objective of achieving
economic growth as well as increased levels of employment. In
addition, it provides an analysis of the factors that affect a nation’s
economic growth. It explains how to achieve the maximum possible
level of economic growth and maintain it.
 It maintains a stable pricing level and analyses changes in business
operations. It makes recommendations for policy actions that may
be used to manage inflation and deflation.
 It explains the various criteria that impact the balance of payment.
At the same time, it offers corrective actions and analyses the
factors contributing to the deficit in the balance of payments.
 It contributes to resolving economic issues that can only be
resolved at the macro level, that is, at the level of the entire
economy, such as poverty, unemployment, and business cycles,
amongst other issues.
 1. What are the goals of macroeconomic policy?
  In macroeconomics, particular attention is paid to achieving three
objectives: economic growth, price stability, and full employment.
The macroeconomic policy aims to provide a stable economic
environment that promotes robust and sustained economic growth.
This growth is necessary for the production of employment, the
accumulation of wealth, and the advancement of living standards.
 2. What are the tools of macroeconomic policy?
 The most important aspects of macroeconomics are monetary
policy, fiscal policy, and fiscal policy. Policy regarding the exchange
rate.
 3. What are the main challenges of macroeconomic policy?
 When addressing widespread challenges such as unemployment,
inflation, and a country’s current gross domestic product,
policymakers must consider various considerations (GDP). As a
result, there are many different schools of thought on the best way
to foster economic development and stability.
Supply side policies are microeconomic policies aimed at increasing supply and productivity in
the economy, to enable long-term economic growth. Some of these policies include:
 Public sector investments: investments in infrastructure such as transport and
communication can greatly help the economy by making the flow of resources quick and
easy, and facilitate faster growth.
 Improving education and vocational training: the government can invest in education and
skills training to improve the quality and quantity of labour to increase productivity.
 Spending on health: accessible, affordable and good quality health services will improve the
health of the population, helping reduce the hours lost to illnesses and increasing
productivity.
 Investment on housing: as more housing spaces are built, the geographical mobility of the
population will increase, helping increase output.
 Privatization: transferring some public corporations to private ownership will increase
efficiency and increase output, as the private sector has a profit-motive absent in public
sector.
 Income tax cuts: reducing income tax will increase people’s willingness to work more and
earn more, helping increase the supply in the economy.
 Subsidies are financial grants made to industries that need it. More subsidies mean more
money for producers to produce more, thereby increasing supply.
 Deregulation: removing or easing the laws and regulations required to start and run
businesses so they can operate and produce more output with reduced costs and hassle,
encouraging investments.
 Removing trade barriers: the govt. can reduce or withdraw import duties, quotas etc. on
imports so that more resources, goods and services may be imported to increase productivity
and efficiency in the domestic economy. It can also reduce export duties to increase export of
 resources, goods and services to other nations, thereby encouraging domestic firms to
increase production.
 Labour market reforms: making laws that would reduce trade union powers would reduce
business costs and increase output. Minimum wages could be reduced or done away with to
allow more jobs to be created. Welfare payments like unemployment benefits could be
reduced so that more people would be motivated to look for jobs rather than rely on the
benefits alone to live. These will not only increase the incentive to work but also increase the
incentive to invest.
For example, India, in the early 1990’s undertook massive privatisation, liberalisation and
deregulation measures; abolishing its heavy licensing and red tape policies, allowing private firms to
easily enter the market and operate, and opening up its economy to foreign trade by reducing the
excessive trade tariffs and regulations. This led to a period of high economic growth and helped
India become the emerging economy it is today.

Supply Side Policies:

Supply-side policies have the direct effect of increasing economic growth as the productive capacity
of the economy is realised. In doing so, it can also create more job opportunities and help reduce
unemployment. Trade reforms will also enable to it to improve its balance of payments.

Exchange Rate Policies

Exchange rate policies are actions taken to influence the exchange

rate in a desired way. Monetary policy will have an impact: on the
exchange race because ,lower interest rates will make a currency
less attractive co foreign investors. They will take money out of the
countries banks so the exchange rate will fall. It ls
possible for a government to use exchange controls to limit the
amount of money moving in and out of a country, but: in today’s
global world this is effectively very difficult. Some countries tie the
value of their currencies to stronger currencies or use public relations to
try and influence opinion .about their strength.