A Level contents

The content of the AS Level is assumed knowledge for the assessment of Paper 3 and
Paper 4. The A Level topic build on the learning acquired in the AS Level topics.
6 Business and environment (A Level)
6.1 External influences on business activity
6.1.1 Political and legal
 the advantages and disadvantages of privatisation in a given situation
 the advantages and disadvantages of nationalisation in a given situation
 how a government might use the law to seek to control: employment practices,
conditions of work (including health and safety), wage levels, marketing behaviour,
competition, location decisions, particular goods and services
 the impact of changes in political and legal factors on business and business decision
All business depends for their survival on understanding and responding to external
factors that are beyond their control. Many of these factors are constrains in the sense
that they may limit the nature of decisions that business managers can take
They include
 political and legal
 economic
 Social influences and demographic
 Technological influences
 Competitors and suppliers
 International trading links
 Environmental influences
Political and legal influences
A country’s political system and the law of the land have influences on business
decisions and activities. These includes.
 Privatisation
 Nationalisation
 Legal controls
Privatisation is the act of selling state-owned and controlled business organisations
to investors in the private sector.
Methods of privatisation

 Public sale of shares

 Public auction
 Public tender
 Direct negotiations
 Transfer of control of enterprises that were controlled by the state or by municipalities
Argument for privatisation
Knowledge skill Analysis skill Developed analysis
Greater efficiency Because of profit motive Leading to more profit
Fast decision-making Less bureaucratic Leading to quick action
process towards the changes in
enviroment
Motivating to employees Greater sense of Reduces labour turnover
and managers empowerment and
responsibility
Raise finance for the From consideration money More tax revenue
government or from sale of share
Access to private capital Most of public company are Allowing them to access
market quoted at the SEM capital through share issue
Argument against privatisation
Knowledge skill Analysis skill Developed analysis
Unhealthy competition Because of duplication of Leads to misallocation of
efforts resources
Lack of accountability to the Private individuals are not Leads to lower standards in
country by the minister answerable to the country production
Creation of monopolies One supplier amidst Lower standard of living
many buyers will lead to because consumers cannot
high prices. afford more goods
Leads to smaller scale Reduces the opportunity Lower production and
operations of cost savings through redudancies
large scale operations

Nationalisation
Nationalisation is the transfer of privately owned businesses to state /government
ownership and control.
Argument for
Knowledge skill Analysis skill
Govt will have greater control of most Ownership translates to them
industries
Possibility of integrating essential The govt can manage to coordinate the
industries supply of essential commodities like
water
Prevent monopolies Reduced exploitation of consumers
 Economies of scale By merging all private businesses into
one nationalised company

Legal constraints on business activity

Governments can decide for political or social reason to introduce laws which constrain
business decisions and activities. These include
 Employment practices and conditions of work
 Marketing behaviour and consumer rights
 Business competition
 Location of business
The law and employment practices
These laws control the relationship between employers and employees. To:
 Prevent exploitation of workers by powerful employers
 Control excessive use of trade union collective action
(a) Employment practices and conditions of work

 Recruitment, employment contracts and termination of employment

 Health and safety at work
 Minimum wages
(i) Recruitment, employment contracts and termination of employment
Protecting the rights of workers usually takes the following forms:
 A written contract of employment must be signed so that the worker is aware of
the pay, working conditions, and disciplinary procedures to be followed
 There are minimum ages at which people can be employed
 The length of the maximum working week is usually controlled by the
government
 Holiday and pension entitlements are usually guaranteed by legal regulations
 Discrimination against people during the recruitment and selection process or
while at work on the grounds of race, religion or gender is illegal
 Dismissal of an employee considered to be unfair can be taken to an industrial or
employment tribunal where both sides of the argument are heard by independent
lawyers. If worker wins case then compensation will have to be paid
(ii) Health and safety laws
This aim to protect the worker from discomfort and physical injury at work. These laws
usually require a business to:
 Equip workplace with safety equipment
 Provide adequate washing and toilet facilities
 Provide protection against dangerous machinery and materials
 Give adequate breaks and maintain workplace temperatures
(iii) Minimum wages is “the minimum amount of remuneration that an employer is
required to pay wage earners for the work performed during a given period, which
cannot be reduced by collective agreement or an individual contract
It is legally binding on businesses. The benefits of a minimum wage are.
Knowledge Analysis
Prevent exploitation of workers----------- who are poorly organised by powerful
employees.
Reduce income inequalities--------------- reduce the gap between the rich and the poor in
the economy
Increases workers’ standard of living –--- the workers are left with more disposable
income
Increases incentive to work------------------- reduced the burden of employed people and
reduces unemployment benefits.
Criticism of minimum wage system
May be avoided by employers ------ by having casual labourers with no contracts
Raises labour costs---------employers may make workers redundant
May lead to demand for higher wages----this may result in inflation due to an increase
on labour costs
Evaluating the impact of employment and health and safety laws on a business
Negative effects- these laws are constraints that add to business costs
Cost will include:
1. Supervisory costs regarding a firm’s recruitment and selection procedures
2. Higher wages if less than the minimum wage was being paid before the law was
passed
3. Protective clothing and equipment to meet health and safety laws
4. Employment of new staff to avoid overlong hours
5. Higher costs for giving pension contributions, maternity leave etc.
Benefits for meeting or exceeding legal minimum requirements:
1. A safe working environment will reduce risks of accidents and time of work due to
illnesses or injury
2. Workers feel more secure and highly valued. This will lead to increased
motivation
3. Failing to meet minimum standards may lead to expensive court cases and
heavy fines
4. Business that provide conditions beyond legal requirements can adopt a high
profile campaign to attract the best employees. These will receive good publicity
and also have marketing benefits
5.The culture of the business will be looked upon as positive this can attract
investors and make it easier to employ new staff and retain existing ones

(ii) marketing behaviour and consumer rights

Here are some reasons governments around the world take legal actions to protect
consumers of goods and services from unfair or unscrupulous business activity:
 Individual consumers are relatively weak and powerless against business with
large, marketing, and promotional budgets
 The increasingly competitive nature of most markets leads to some firms trying to
take advantage of consumers by reducing quality, service, and guarantee
periods to offer an apparently low price and better deal
 Due to increased globalisation leading to increased imported goods, consumers
may need protection from producers of goods that adopt different quality and
safety standards from those of domestic market
 Selling techniques are becoming more pressurized and are increasingly difficult
for some consumers to resist. These can lead to consumer buying a product that
they would otherwise not have wanted
 Products are becoming more scientific and technological making them more
complex and difficult for consumers to understand how they operate and
therefore assess the validity of the claims made about them.
Examples of some of the main UK protective laws:
i. Trade description act- there should be no misleading descriptions or claims made
for goods sold
ii. Sales of goods act- the three main conditions are:
 Goods and services have to be fit - they should be safe and have no defects in
them that would make it unsafe to use if used as intended
 Goods must be suitable for the purpose bought
 Goods must perform in the way described
 iii. Consumer protection act- Firms that provide dangerous or defective products
are liable for the cost of any damage they cause, and it is illegal to quote
misleading prices

Impact on business of consumer protection laws

When a business complies with these laws, it increases their costs for:
 Redesigning the product to meet customer’ expectations as per the Sale of
Good Act.
 Redesigning advertisements to give only clear and accurate information as
required by trad description Act
 Improving quality -control standards as per the Consumer Protection Act,.
 Changing the culture and strategy in the business to comply with the laws that
protect consumers
 Implementing weighing equipment for accurate weights and measurement as
per the weight and measure Act.
 Installing healthy and safety equipment’s at work
Benefits of consumer protection includes:
 Reduced risk of consumer injury
 Reduced court cases and fines
 Improved customer loyalty for products
 Good reputation for quality, safety, fairness, and honesty
 Reduces the number of accidents at place of work.
(iii)The law and Business competition
Governments attempt to encourage and promote competition between businesses by
passing laws that:
 Investigate and control monopolies. (Theoretically a situation in which there is
only one supplier with no close competitor).
 and make it possible to prevent mergers.
 Limit or outlaw uncompetitive practices between firms e.g. formation of cartel,
collusion on price
 Uncompetitive – or restrictive practices. (These are attempts by firms often acting
or colluding together – to interfere with free market forces and so limit choice for
customers or drive-up prices)
i.e., collusion where businesses agree to work together and restrict competition
by fixing prices and sharing contracts between themselves.
Examples of such restrictive practices include:
  Predatory pricing- when a major firm tries to block new competitors by charging
very low prices for certain goods, making it hard for the competition to survive as
they may not be able to match up the price
 Refusal to supply retailer if they do not agree to charge the prices determined by
the manufacturer
 Full-line forcing- this is when a major producer forces a retailer to stock the whole
range of products from the manufacturer, not just the popular ones. If the retailer
refuses not even those popular ones will be supplied any longer
 Market sharing agreements- this involves forming a cartel between the firms
concerned. They agree to fix prices and divide the market amongst themselves
and not to compete for new business
Free and fair competition between businesses benefit consumers in the
following ways:
 Wider choice of goods and services
 Low prices to remain competitive
 Improved quality as businesses seek to outsmart each other
 Local firms become competitive against foreign firms, strengthening the
domestic economy.
Social and demographic influences
Changes in society, can influence business decisions, such as the business obligations
to its stakeholders. This is expressed in a firm’s corporate social responsibility.
Corporate social responsibility is when a business accepts responsibilities to its
stakeholders over and above its legal obligations.
CSR is indicated by the way in which the decisions of a business impact on society and
the environment.
CSR and social issues.
CSR and accounting practices
Any deliberate attempt to distort the profitability or value of a company to give a
misleading picture is socially irresponsible and illegal. Some of these behaviours
includes:
 Reporting misleading profit figures that convince shareholders that a company is
a good potential investment
 To inflate the value of a business so that lenders are more willing to advance
loans.
Such practices are known as accounting window dressing which is defined as practices
that make accounts appear more favourable.
CSR and the payment of illegal incentives.
Most governments have laws to prevent these incentive payments because they lead to
distorted marketplace where it is not the best product that get a contract or the worst
wrong doer who pays fines. Some of these payments includes:
 Awarding incentive payment to a manager to get a contract
 Award incentive payments to government officials to get a subsidy
 Awarding the payment to avoid legal action for breaking environmental laws

CSR and social auditing

There is a growing demand for business to report annually on how socially responsible
they have been in form of an annual social report known as social audit.
Social audit is a report on the impact a business has on society
Social audit includes:
 a health and safety record (e.g. the number of accidents and fatalities)
 pollution levels
 contributions to local community events and charities
 the proportion of supplies from ethical sources (e.g. Fairtrade suppliers)
 employee benefit schemes
 feedback from customers and suppliers on the ethical nature of the business’s activities
 annual targets for social responsibility measure
Benefits of social audits
 They identify what social responsibilities the business is meeting and what still
needs to be achieved.
 Managers can set targets for improvement in social performance by comparing
these audits with the best-performing firms in the industry.
 They improve a company’s public image, which acts as a useful marketing tool to
increase sales
Limitation of social audit
 If the social audit is not independently checked, it may not be taken seriously by
stakeholders.
 Detailed social audits require time and money
 Some consumers are just interested in cheap goods, not whether the businesses they buy
from are socially responsible or not.

Why business need to consider community needs (benefits of CSR)

  improving the public image of the business, making it more attractive to investors
and socially aware consumers
 increasing the chance that the community will accept business decisions such as
expansion or relocation
 increasing the chance that the business will receive government grants and
subsidies
 reducing the risk of negative action being taken against the business by pressure
groups
Demographic influences
The structure of society is constantly evolving. Changes in size and structure of
population can occur at:
Local level: examples include an increase in the local population due to a large settlement of foreign
refugees or the building of large new housing estates.

National level: examples include an increase or a decline in the national birth rate and an ageing
national population.

Global level: examples include the projected growth in the world’s population from almost 8 billion in
2020 to 11 billion by 2100. The world population has doubled since 1970.

The changes occurring in many countries are:

 An ageing population with reduced birth rate and longer life expectancy,
although in some countries average age is falling due to high birth rates
 The changing role of women- women are becoming more empowered and
are seeking employment than in previous years
 Better provision of education facilities, which is increasing literacy and
leading to more skilled and adaptable workforce
 Early retirement is leading to more leisure time for a growing number of
wealthy pensioners
 Rising divorce rated leads to increased number of single person
households
 Job insecurity often created by globalisation forcing more employees to
accept temporary part time jobs
Impact on the business of social and demographic change
Ageing population
This means that the average of population is rising and is associated with:
 a larger proportion of the population over the age of retirement
 a smaller proportion of the population below 25 years of age
 a larger number of dependants on social benefits, putting a higher tax burden on
the working population.
These changes result from lower birth rate, more women in work and longer life
expectancy and are clearly
 Changing pattern of demand as greater number of customers change their taste.
Market research is necessary for companies who demand of their product
changes due to ageing population
 Age structure of workforce may change. The number of youthful employees may
change and therefore the business should plan for an older workforce
Patterns of employment
Changing patterns of employment are one of the socials constrains on the activities of
business
The main features of changing patterns in most countries include:
 Labour being replaced with capital.
 An increase in the number of women in employment
 An increase in part time employment and flexible employment contracts
 An increase in student employment on a part time basis
 Transfer of labour from old established industries such as steel to new high-tech
industries such as computer game design
 More women taking maternity leave then return to work
Evaluating effects on business of changes in the pattern of employment
1. Firms can make these changes work to their own benefit
2. Higher quality and better qualified workers should be more efficient
3. Part time workers can offer the business greater flexibility
4. By employing more women and removing barriers to their progress and
promotion firms can benefit from a wider choice of staff and improved motivation
among women workers
Environmental constraints on business activity
Then environment in which we live in can be greatly and has been affected by business
activity
Arguments for adopting an environmentally friendly business strategy
1. Businesses can reduce pollution by using the lasts green technology rather than
scarce natural products this can have real marketing and promotional advantage
as consumers become more environmentally aware.
2. Low polluting production methods and reasonable waste disposal will reduce the
chances of the business breaking the law avoiding fines and bad publicity
3. Business that switches to a more environmentally friendly strategy often report
an improvement in the number of quality applications they receive from potential
employees.
 4. Long term financial benefits can be incurred e.g., if firms use solar panels to
generate electricity, as opposed to fuel and gas which are becoming increasingly
expensive. Moreover, the business avoids cost of paying additional penalties if
their activities are seen to cause health issues.
Arguments against adopting environmentally friendly strategies.
1. Profits may be reduced if expensive but low polluting equipment is used or if
waste is disposed of in a responsible way, this will limit firm’s investments in the
future.
2. There might be a marketing advantage from keeping costs as low as possible,
even though the environment is damaged as a result. Consumers benefiting from
low prices as a result are likely to overlook environmental damage.
3. In many countries legal protection of the environment is weak and inspection
systems are inadequate, there will as a result be little risk of legal action and
heavy fines against damaging business activity.
4. In developing countries, it is argued that economic development is more
important. Businesses can achieve better by producing cheaply in these
countries than adopting the greenest production strategy.
Environmental audit- assess the impact of a business activities on the environment.
Evaluation of environmental and social audits
1. Until they are made compulsory there is general agreement about what they
should include and how contents will be verified some observers may not take
them seriously
2. Companies have been accused of using them as a publicity stunt to hide their
true intentions and potentially damaging practices.
3. They can be very time consuming and expensive to produce and publish and this
may make them of limited value to small businesses
Environmental and ethical issues
Pressure groups- organisations created by people with common interest or aim who
put pressure on businesses and governments to change policies so that an objective is
reached. Some of the best know examples are :
Greenpeace – campaigns for greater environmental protection by businesses adopting green strategies
and governments passing tighter anti-pollution laws.

Fairtrade Foundation – aims to achieve a better deal for agricultural producers in low-income
countries.

Amnesty International – rigorously supports human rights, especially in countries where these are at
risk because of government action.

Extinction Rebellion – encourages demonstrations to force governments to act against climate change
Pressure groups want changes to made in the following areas-
 Government to change their policies and pass laws supporting the aims of
groups.
 Business to change damaging policies.
 Consumers to change their purchasing habits so that business can adopt
appropriate policies.
Methods used by pressure groups
i. Publicity through media coverage- frequent press releases detailing
undesirable business activities and coverage of direct-action groups will help
keep the campaign in the public eye
ii. Influencing consumer behaviour- they can be successful in influencing
consumers to stop buying the business products
iii. Lobbying of government- this means putting the arguments of the pressure
group to governments members because they have the power to change the law
6.1.2 Economic
2. Impact of technology on business activity
Information technology- the use of electronic technology to gather, store and process
and communicate information
Different types of IT applications to a business include:
 Spread sheet programs
 Computer aided design CAD
 Computer aided manufacturing CAM
 Internet/intranet
 Word processing
 Databases
Potential limitations of IT
i. Costs- labour training and regular technological development will be expensive
moreover redundancy cost will be incurred for staff being replaced by technology
ii. Labour relations—this can be damaged if the technological change is not
explained and presented to workers in a positive way with reason for it fully
explained
iii. Reliability- breakdown in an automated system can lead to the whole process
being halted
iv. Data protection- cost of securing sensitive data from unwarranted individuals
v. Management- some managers fear change and thus will resist especially if they
are not computer literate
 ECONOMIC OBJECTIVES OF GOVERNMENTS
All governments set targets for the whole economy and these are referred to as macro-
economic objectives
They include:
 Economic growth- raising GDP
 Low price inflation- the rate at which consumer prices on average increase each
year
 Low rate of unemployment
 A long term balance of payments between the value of goods imported and the
value of goods exported
 Exchange rate flexibility
 Wealth and income transfers to reduce inequalities
N/b some of these objectives will conflict with each other and not all can be achieved at
the same time
1. Economic growth
Economic growth- an increase in a country’s productivity potential measured by an
increase in its real GDP
Gross domestic product- the total value of goods and services produced in a county
in one year- real GDP has been adjusted for inflation
Importance of economic growth
1. Higher real GDP increases average standards of living
2. Decrease in unemployment which will increase consumer incomes
3. More resources can be devoted to desirable public sector projects without
reducing resources in other sectors
4. Absolute poverty can be reduced or even eliminated if growth is substantial
enough and the benefits are widely spread
5. Business experience a rise in demand for their products (depends on Income
elasticity)
6. More resources available for government through greater income taxes and
decreased burden of social expenditure e.g. reduced unemployment benefits
Factors that lead to economic growth
 Increases in productivity
 technological and expansion of industrial capacity
 Increases in economic resources such as higher working populations
 discovery of new resources
 Business investment- expenditure by businesses on capital equipment , new
technology and research and development
Economic growth does not grow in a continuous trend, but it follows an unsteady on
illustrated by the business cycle
Business cycle- the regular swigs in economic activity measured by real GDP, that
occur in most economies, varying from boom conditions to recession
The four key stages are:
a. Boom- a period of very fast economic growth with rising incomes and profits thus
the economy enjoys advantages of economic growth. However boom often sows
the seed for its own destruction. Inflation rises due to very high demand for
goods and serviced, and shortages of key skilled workers lead to high wage
increases. High inflation makes an economy’s goods uncompetitive and business
confidence falls as profits hit high costs. The government or central bank often
increases interest rates to reduce inflationary pressure

b. Downturn or recession- the effect of falling demand and higher interest rates
start to bite. Real GDP growth slows and may begin to drop. Income and
consumer demand fall and profits are much reduced.
c. Slump- a very serious and prolonged downturn can lead to this where GDP falls
substantially and house and asset prices fall. This is much likely to occur of the
government fails to take corrective economic action.
d. Recovery and growth-all downturns eventually lead to a recovery when real
GDP starts to increase again

Is recession always bad?

Recession- a period of 6 months or more of declining real GDP
Recession has serious consequences for most businesses and the whole economy,
however there will also be opportunities that well managed firms might take advantage
of:
Capital assets such as land and property will be relatively cheap and firms can invest
then in expectation of economic recovery
1. Demand for inferior goods could increase
2. Risk of retrenchment may encourage workers to work harder increasing
efficiency
3. Business can become leaner and fitter due to closure of some offices and
branches
 2. The aim of government is Low and Stable Inflation
Inflation is defined as the persistent increase in the level of consumer prices or a
persistent decline in the purchasing power of money caused by an increase the
supply of domestic currency and credit beyond the proportion of available goods and
services. Over the long term, inflation erodes the purchasing power of your income
and wealth. This means that, as you save and invest, your accumulated wealth buys
less and less. High rate of inflation leads to lower purchasing power for consumers
resulting in lower demand for goods and services. Moreover, a higher inflation rate
will make business uncompetitive in the international market leading to lower sales
for the business.
How to measure Inflation
 Every month the Government surveys prices and generates the current
consumer price index
(CPI)
 This allows the government to compare current figures with past figures
 Consumer basket is established ( a sample of goods which are usually bought
by people and
this goods have a direct impact on the people’s standards of living)
 Weight are assigned to the goods to reflect the importance of each good in the
consumer basket
 A base year is also established. This a year where there is low/no inflation. The
CPI in the base year is usually 100
 If the current CPI is 120 then the inflation rate will be 20% in comparison
with the inflation rate which prevailed in the base year.
Formula:
Inflation rate = (CPI1 - CPI0)/CPI0 x 100
Causes of Inflation
Demand-Pull Inflation: This inflation occurs when the government / consumers /
business try to purchase more output than the economy is capable of producing.
Thus inflation results when the macro economy has too much demand for
available production.
Major drivers of demand pull inflation
 Unnecessary printing of more note and coins by the central bank
 Excessive government expenditure
 Supply shortages
Policies to designed to solve demand –pull inflation
 Reduce government expenditure and increase taxation (fiscal policy)
 The central bank must raise interest rates and reduce the supply of notes
and coins in the economy (monetary policy)
 The government to work on supply bottlenecks
Reducing demand –pull inflation and the impact on businesses
 High interest rates will discourage investments
 Aggregate demand will fall and the firms may decide to relocate to other
countries
 Businesses may begin to offer less expensive goods
Cost-Push Inflation: Cost-push inflation is inflation due to decreases in supply,
primarily due to increases in production cost
Major drivers of cost-push inflation
 Increase in wages
 Increase in the world price of imported raw materials
 Lower exchange rate pushing up prices of imported raw materials
 Increase in the cost of production
Policies to designed to solve cost-push inflation
 High exchange rate policy (revaluation of domestic currency)
 Discourage high wages by limiting trade union powers
 Come up with cheaper local resources
 Reduce indirect taxation
 Provide subsidies to firms
Reducing cost -push inflation and the impact on businesses
 High interest rates will discourage foreign direct investments
 High exchange rate will make exports less competitive on the world markets
 Workers become less productive when the wages are reduced
Business strategies in period of inflation
 Try to reduce labour costs
 Avoid excessive borrowing
 Sale goods on cash basis
 Reduce the credit period to customers
 Avoid unnecessary expansion programs
Deflation
Refers to a fall in the average or general price level of goods and services. The
purchasing power of money will be increasing. Thus, one dollar will be buying more
goods today than it did yesterday.
Deflation occurs when the inflation rate falls below 0%. This should not be confused
with disinflation, a slowdown in the inflation rate. Inflation reduces the real value of
money over time.
Business strategies in period of inflation
  Sale goods on credit basis
 Borrow more money for expansion
 Increase the repayment period to credit customers

3. Unemployment
Unemployment- this exists when members of the working population are willing to
works and able to work but are unable to find a job
Working population- all those in the population of working age who are willing and
able to work
Costs of unemployment
1. The economy could be producing more goods and services which would then be
available for consumption
2. The cost of supporting unemployed workers and their families is substantial and
is paid for out of general taxation
3. High unemployment may lead to social problems e.g. crime
4. Unemployment reduces demand for goods and services by reducing the incomes
of those looking for work
5. There will be loss of income and lower living standards
6. The longer the period of unemployment, the more difficult it is to find work as
skills become increasingly outdated
Government policy towards the causes of unemployment
Cyclical unemployment- unemployment resulting from low demand for goods and
services in the economy during a period of slow economic growth or a recession
Causes
 Caused by the business cycle
 Unemployment which result from low demand for goods and services in the
economy during a period of slow growth or recession
 Cyclical unemployment can lead to a decrease in sales meaning
businesses need to look for new markets
Solutions
 The government attempts to manage economy to avoid substantial swings in
business cycle
 Government prescribes anti-inflationary measures
 Government may aim to maintain a competitive rate of exchange so that
overseas demand for domestic goods does not fall Increase government
expenditure and reduce taxation (fiscal policy)
 Increase the supply of notes and coins and reduce interest rates (monetary
policy)
  Maintain a competitive exchange rate so that the demand for exports does not
fall (exchange rate policy)
Structural unemployment- unemployment caused by the decline in important
industries, leading to significant job losses in one sector of the industry.
This can be a result of
 changes in consumer taste and expenditure
 Workers in some industry may find demand for their products declining
 Improvements in technology in many industries means that employers are
looking for adaptable and multiskilled workers. Manual and unskilled workers
thus find it difficult to adapt to these requirements
 Deindustrialisation has left many without jobs where their skills are transferable
 The government will aim to provide educational and training programs for
workers without the necessary skills
 The government will aim not to prevent the economic changes
Solutions
 Training is needed to give the unemployed workers new skills
 The government to invest in declining industries
Frictional unemployment- unemployment resulting from workers losing or leaving jobs
and taking a substantial period of time to find alternative employment
 Caused when people are temporarily out of work as they are changing jobs.
What it means is that the jobs are available somewhere in the country but it
takes time for unemployed to for the unemployed to apply for the jobs, to
attend interviews and to relocated to those areas. Frictional unemployment is
not a problematic type of unemployment .
solutions
 The government will provide information about job opportunities
 The government can also reduce unemployment benefits for those who are slow
to find alternative employment to motivate them to find work more quickly
 Government can build job centres or employment agencies
Other overall strategies to combat unemployment include:
1. Supply side polices- these will increase the productive capacity of an economy,
they are used to increase the production or supply of goods and services they
include :
a. Privatisation- this will lead to increase in productivity and investment thereby
resulting to an increase in demand for labour
b. Subsidies, tax holiday and tax cut- these incentives given to producers by the
government in order to encourage production and investment at lower cost,
increase in production means more staff needed
 c. Free trade- will lead to an expansion in the market for products thereby leading
to an increase of production in goods. These will require more labour
Research and development- this may lead to inventions and innovative products
which will lead to increase in demand for labour to produce them
d. Improvement of labour mobility- the government can control the level of fictional
unemployment caused by high bargaining power of trade unions by controlling
their activities and power
Effects of high unemployment
 Decrease in the output of goods and services in the economy
 Lower living standards for the unemployed
 Increase in social problems e.g crime and other social ills
 The government has to give the jobless people unemployment benefits
 The skills of the unemployed people become increasingly out dated

4. Balance of payments (current accounts)

-the government must also aim to have balance of payments equilibrium. i.e exports
should be equal to imports. Balance of Payments is a national account which records
the movement of goods and services into and out of the country. It has two main
accounts:

i. Current account: records the movement of goods and services between a

country and all its trading partners
ii. Capital account: records the outflows and inflows of financial capital
BOP deficit

-occurs when the imports are greater than exports

Effects of a BOP deficit

 Depreciation of domestic currency

 Depletion of foreign currency reserves
 Foreign investors will be reluctant to invest in the country
 Rising external debt
A persistent deficit in BOP may have the following impact on the country
 A fall in the value of its currency
 A decline in the country’s reserves of foreign currency
 An unwillingness of foreign investors to put money into the economy
The impact of the above problems to a business are as follows:
 An exchange rate fluctuation that will make importing and exporting too risky
  Government may make polices to control the deficit e.g. tariff and quotas which
may have serious retaliation by other countries thus reducing export demands

Ways of correcting a BOP deficit

Tariffs: tax levied on imported goods to increase their prices and reduce their
demand in the domestic economy. They are also known as customs duties

Quotas: physical limit on the quantity of goods to be imported

Embargo: total ban of the imports

Devaluation: a deliberate attempt by the government to reduce the external

value of domestic currency

Subsidising local firms: this will make the production of domestically produced goods
cheaper.

5. Exchange Rate Policy

The government can also try to influence the economy by adjusting the external value of
domestic currency. The government can choose to fix the exchange rate or to allow it to
float (or to be determined by demand and supply factors) or to join a monetary union
where member countries uses a common currency.
Key definitions
Exchange rate exchange - the price of one currency in terms of another
Exchange rate depreciation- a fall in the external value of a currency as measured by
its exchange rate against other currencies
Exchange rate appreciation- a rise in the external value of a currency as measured by
its exchange rate against other currencies
Types of exchange rate
Free Floating Exchange Rate
The exchange rate is determined by the operation of the price mechanism. The
interaction of the demand for and supply of foreign currency will determine the
equilibrium exchange rate.
Advantages
 Automatic correction of BOP disequilibrium.
 Reduces need for the foreign currency reserves
 May reduce speculation as the exchange rate move freely up or down
Disadvantages
 Fluctuating prices of imported raw materials and components, making
costing of products difficult
 Fluctuations in export prices and overseas competitiveness, which lead to
 unstable levels of demand
 Uncertain over profits to be earned from trading abroad or from investing
abroad.
Fixed Exchange Rate
An exchange rate that is determined by the government. The government will set an
exchange rate then make an effort to support it to prevent the exchange rate from
moving up or down.

Advantages
 Stable exchange rate provide a basis for business expansion
 Stability encourages increased trade
Disadvantages
 Large reserves of foreign currency are required to support the exchange rate
 There is no auto-correction of BOP deficit
Managed Float or Dirt Float Exchange Rate System
Refers to a situation where the exchange rate is allowed to fluctuate between the set
exchange rate bands. Thus it is partly fixed and partly determined by market forces.

Joining a Common Currency or Currency Zone

An economy may join a monetary union which uses common currency. Example the
Euro

Advantages
 Planning is made easy since one currency is used
 No extra cost of converting domestic currency into foreign currency
 Comparison of prices from different countries becomes easy

Disadvantages
 Conversion costs from one currency to the common currency could be high in
terms of dual pricing and the changeover of notes and coins
 Local central bank will lose its independence to control money supply

Domestic firms that gain from appreciation

1. Importers of foreign raw materials and components for whom the domestic
currency cost of these imports will be falling. Increasing their competitiveness
2. Importers of foreign manufactured goods, who are able to import the product
more cheaply in terms of domestic currency
Domestic firms that lose from appreciation
1. Exporters of goods and services to foreign markets, because of the higher
products and services in terms of the foreign currency
 2. Businesses that sell goods and services to the domestic market and have foreign
competition- the domestic products will be more expensive compared to imported
goods, thus consumers are likely to switch to the cheaper option
Domestic business that gain from depreciation
1. Home-based exporters- who can now reduce their prices in oversea markets
2. Business that sell domestic products will experience less price completion from
importers
Domestic business likely to lose from depreciation
1. Manufactures who depend heavily on imported supplies of materials,
components or energy sources
2. Retailers that purchase foreign supplies

Macro Economic Policies

To achieve its objects the government will use macro economic policies. Macro
economic policies are defined as the set of government rules and regulations to
control or stimulate the aggregate indicators of an economy. These policies are
designed to work on the whole economy
Fiscal Policy
Fiscal policy is the use of government spending and taxation to influence the
economy. When the government decides on the goods and services it purchases, the
transfer payments it distributes, or the taxes it collects, it is engaging in fiscal policy.
The primary economic impact of any change in the government budget is felt by
particular groups i.e A tax cut for families with children, for example, raises their
disposable income.
Government Budget/ National Budget = Tax revenue – Government spending
Government budget deficit- arise when the value of government spending exceeds
revenue from taxation
Government budget surplus occurs when taxation revenue exceeds the value of
government spending
Types of Fiscal Policy
Tight or Contractionary Fiscal Policy
Fiscal policy is said to be tight or contractionary when revenue is higher than
spending (i.e., the government budget is in surplus) . The government will
deliberately reduce its expenditure and raise taxation. The overall result will be a
reduction in the level of aggregate demand so as to curb inflationary pressure and
BOP deficits. This policy is usually used by the government when the economy is
booming and is in the danger of overheating
Loose or Expansionary Fiscal Policy
loose or expansionary occurs when spending is higher than revenue (i.e., the budget
is in deficit). The government will deliberately increase its expenditure and reduce
taxation levels. Aggregate demand will increase hence national output and
employment will increase. This policy is usually used by the government when the
economy is in a recession
Impact of Fiscal Policy on businesses
 Direct taxes will affect consumers’ disposable income. Disposable income refers
to income
after tax
 Direct taxes also affect company profits
 Indirect taxes will increase retail prices of goods and the impact on
either consumers or businesses will depend on the elasticity demand
for each product
 Reduced government spending will affect businesses that provide goods and
services directly to the government i.e firms that used to benefit from
government tenders

Monetary Policy
Monetary policy is the process by which the monetary authority of a country controls the level of interest rates
and the supply of money with the purpose of promoting stable employment, prices, and economic growth.

Type of Monetary Policy

Loose or Expansionary Monetary Policy
It occurs the government through its central bank increases the supply of notes and coins and lower the level of
interest rate to increase the level of aggregate demand in the economy. An increase in money supply will
decrease interest rates and investment is promoted. A rise in investments will increase aggregate demand in
the economy hence national output and employment will increase. Expansionary monetary policy is used when
the economy is in a recession
Tight or Contractionary Monetary Policy
It occurs the government through its central bank decreases the supply of notes and coins and raises the level of
interest rate to decrease the level of aggregate demand in the economy. A decrease in money supply will
increase interest rates and investment is discouraged. A fall in investments will decrease aggregate demand in
the economy hence inflationary pressure is reduced. Tight monetary policy is used in a boom where the inflation
rate is very high.
Impact of Monetary Policy on Businesses
 Interest rates affect the cost of borrowing to the businesses which then affect its
profitability
 Interest rates affects consumer borrowing, and this may lead to fall in
demand for goods and services
 Changes in interest rates may affect the exchange rate which then affect the
ability of firms to buy raw materials from outside.
Summary
Impact on the Economic Environment
Positive effects
1) Job creation
2) Boost to the local economy –development of infrastructure e.g. roads,
water, sewerage, communications, buildings etc
3) Increased tax income for the government
4) Increased income for the local people
5) Attraction of other firms into the area
6) Greater social cohesion
Negative effects
1) Expansion at the expense of rivals – unfair competition
2) There will be pressure on resources which may push up costs e.g. rent, rates, wages
etc
3) Increase in external costs e.g. congestion, pollution and noise