LCBL Lecture 1 and 2 Business and the Economy

LO 1. Understand the main causes of economic growth,

inflation and unemployment
1.1 Discuss two possible causes of: a) economic growth b) inflation c)
unemployment

LO 2. Understand the effects that changes in the economy

may have on business
2.1 Analyse, using two examples, how firms may respond to changes
in economic growth
2.2 Discuss two effects that inflation may have on firms and assess the
strategies they may use to deal with them
2.3 Assess two effects of increased unemployment on a firm.

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 Definition of economic growth

Economic growth is an increase in the capacity of

an economy to produce goods and services,
compared from one period of time to another.

A growing or more productive economy can make

more goods and provide more services than
before.

http://www.investopedia.com/terms/e/economicgrowth.asp#ixzz4im3LXwyB

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 Economic Growth Is a quantity based concept - not
quality based
• An increase in Gross National Product (GNP)

• GNP: Measures the dollar value of all goods and services

that an economy produces during a specified timeperiod

 some goods and services are considered more

valuable than others.
e.g. a smartphone is considered more valuable than a
pair of socks or a glass of water.
Growth has to be measured in the value of goods and
services, not only the quantity of goods.
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 Discussion
• A direct measure of changes in
the size of the economy

–Is it a measure of welfare?

–Is it a measure of Development?

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 ECONOMIC GROWTH

Economic growth (E) is measured by increases in any of the

following:
a) Total Expenditure in the economy i.e. Aggregate
Demand.
b) Total Income for individuals and companies in the
economy
c) Total Output in the economy

There are various measures available:

1) Gross Domestic Product (GDP)
2) Gross National Product (GNP)
3) Aggregate Demand Formula: E = C + I + G + (X-M)
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 AGGREGATE DEMAND
 Aggregate demand contributes to Economic
Growth.
 Aggregate demand is the total demand of an
economy.
 It refers to the total amount of money spent by
all key stakeholders of the UK economy:
• Home consumer
• UK firms
• Govt.
• Overseas consumers
• Overseas firms. Veerendranath Gowrea 6
 Aggregate demand
Aggregate demand= C+ I + G + (X-M)

C= consumption (consumer spending)

I= Investment (by businesses)
G= Government spending

X= exports
M= Imports (imports are subtracted because they reduce
demand in a countries economy).

 Any increases in these will cause aggregate demand to rise.

X Decreases will cause aggregate demand to fall.

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 Aggregate demand curve
when overall prices are low, demand will rise-
GDP will rise. The cheaper prices are, the more
demand.
(inflation)
When prices are high, there is less demand
overall,- levels of output (GDP) will be less, less
employment.

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 Causes of Economic Growth
 A DISCOVERY OF NEW OR BETTER ECONOMIC RESOURCES.

 GROWING THE LABOR FORCE. All else equal, more workers

generate more economic goods and services. a high influx of
cheap, productive immigrant labour.

 CREATING SUPERIOR TECHNOLOGY OR OTHER CAPITAL GOODS.

Depends on savings and investment necessary to engage in
research and development.

 INCREASING SPECIALISATION. more skilled workers at their crafts,

raising their productivity through more practice or more training.

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 3 MAIN CAUSES OF INFLATION
Inflation is the name given to a general increase in
price levels, manifesting itself in a general decline in
the value of money and decline in the purchasing
power of money.
A fall in the price level is termed ‘deflation’
3 MAIN CAUSES OF INFLATION:
- DEMAND PULL INFLATION
- COST PUSH INFLATION
- EXCESSIVE GROWTH IN THE MONEY
SUPPLY (QUANTITY THEORY OF MONEY)
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 DEMAND PULL INFLATION
Demand pull inflation occurs when the economy is buoyant and
there is a high aggregate demand in excess of the economy’s ability
to supply.
TWO MAIN CAUSES:
1) Fiscal : an increase in government spending or a reduction in
taxes and interest rates will raise demand in the economy.
2) Credit: if levels of credit extended to customers increase,
expenditure will rise thus raising the debts of customers also.

- an increase in demand for factors of production, so factor

rewards (wages, interest rates etc.) will rise.

The factors of production include land, labor, capital and

entrepreneurship.

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 COST PUSH INFLATION

• Cost push inflation occurs when there is

an increase in the prices of factors of
production (e.g. wages) .

• Problem occurs if there is no matching

rise in productivity levels.

• Import cost push inflation occurs when

the costs of essential imports rise.
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Veerendranath Gowrea 13
 How does inflation affect firms?
 rise in costs and uncertainty
 high inflation can negatively affect a firms
profits
 deflation (falling prices) could also be very
damaging for economic growth and firms.
 If inflation is high, then firms will have to update
prices more regularly
 wage rises may be expensive for the firm
 firms less willing to invest because they are
uncertain over future costs, wages and future
demand Veerendranath Gowrea 14
 Employment and Unemployment defined
Employment is the number of people
working in the economy.

Unemployment is the number of people

who are actively looking for work but aren’t
currently employed.

The labor force is equal to the sum of

employment and unemployment.
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 Unemployment Rate defined
• The unemployment rate is an indicator of
the state of the labor market, but should
NOT be taken literally as a measure of the
fraction of people who want to work but
can’t find jobs

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 The problem of Discouraged workers
– One of the most devastating experiences a person
can have is to be out of work for a prolonged period
• Discouraged workers are those who have given
up looking for work and have simply dropped
out of the labour force because they feel they do
not have a chance of getting one.
• So it may understate the true level of
unemployment because it does not include
discouraged workers.

• The Bureau of Labour Statistics does not count discouraged

workers as part of the labour force and thus as unemployed

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Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
 How Accurate Is the Official
Unemployment Rate?
• The unemployment rate includes as
unemployed, people who say they are
looking for a job who are really not.
• Many are “working off the books,
others are vacationing.
• It may overstate the true level of
unemployment.
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 The Effects of Recessions and
Expansions on Unemployment and
Aggregate Output:
In general, the unemployment rate
rises during recessions and falls
during expansions.

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 Types of Unemployment

• Frictional unemployment
• Structural unemployment
• Cyclical unemployment

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Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
 Frictional Unemployment
• The frictionally unemployed are:
people who are between jobs
or just entering or re-entering the
labour market after leaving their job
– Usually weeks or months pass before
positions are filled
– At any given time, about 2 or 3 percent
of the labour force is frictionally
unemployed
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Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
 Structural Unemployment definition

• Structural unemployment is that caused

by economic restructuring making some
skills obsolete.

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 Structural Unemployment
• A person who is out of work for a relatively long
period of time, say, a couple of years, is
structurally unemployed. Some examples are
– Steelworkers and coal miners who are out of work
because local steel plants and coal mines have
closed
– Clerical workers, typists, inventory control clerks
who have been made obsolete by a computer system
– People who are functionally illiterate and who are
virtually shut out of the labour force
• Our educational system turns out 1 million more functional
illiterates every year
– About 2 to 3 percent of our labour force is always
structurally unemployed

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 Cyclical Unemployment
• Cyclical unemployment is anything above
the sum of frictional and structural
unemployment
– Caused by the ups and downs in our economy
known as the business cycle
• Cyclical unemployment is that which results
from fluctuations in economic activity.
• Fluctuations in our unemployment rate are
due to cyclical unemployment

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Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
 Natural (or target) Rate of Unemployment

• The target rate of unemployment is the

lowest sustainable rate of unemployment
that policymakers believe is achievable
under existing conditions.

• It is sometimes called the natural rate

of unemployment.

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solutions

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 DEFINITION Policy
Policy is a way of expressing the broad purposes of
government in a particular field with some desired
outcomes in mind.
- A specific proposal: e.g. to raise revenue by indirect as
opposed to direct taxation

Public sector policies have some element of political choice

attached to them as opposed to decision-making framework
in a business enterprise.
 What is Fiscal policy?
Fiscal Policy refers to changes in government spending,
welfare benefits and taxation, and the amount that the
government borrows, to influence both the pattern of
economic activity and also the level and growth of aggregate
demand, output and employment.
Fiscal Policy involves:
a) Taxation and other sources of income
b) Government spending (injection into the economy)
c) Borrowing whenever spending exceeds income
d) Repaying debt when income exceeds expenditure
 GOVERNMENT MONETARY POLICY- EXAMPLES
Monetary policy consists of non-fiscal adjustments made between budgets.
Monetary policy influences economic activity and control inflation through:
a) Interest rates
b) Exchange rates
c) Control of money supply
d) Controls over bank lending and credit

EXAMPLES:
e) A policy of low interest rates or no credit control at all might
stimulate bank lending, which increases expenditure and lead to
increased inflation.
f) A policy of high interest rates might act as a deterrent to
borrowing and reduce spending in the economy and reduce
inflation.
g) Strict credit controls put restrictions on bank lending, so reduce
demand in the economy and reduce inflation. BUT reduce also
….??
 GOVERNMENT EMPLOYMENT POLICIES

• SPENDING MORE ON JOBS e.g. recruiting more

civil servants
• ENCOURAGING GROWTH in private sector
• ENCOURAGING TRAINING in vocational an job
skills
• OFFERING GRANT ASSISTANCE TO EMPLOYERS
• ENCOURAGING LABOUR MOBILITY towards
regions where there are more jobs
http://www.economicshelp.org/blog/1017/inflation/how-does-inflation-affect-firms/

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 Must do

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 MUST do a table of contents
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 MUST choose an organisation if asked
 MUST do at least 2,000 words
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