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Chapter (7) Macroeconomics
Government economic objectives
1.) To achieve economic growth
2.) To attain low level of inflation
3.)To get low level of unemployment
4.) To gain balance of payment (Export = Import)
5.) To reduce the gap between the rich and the poor.
6.) To protect environment.
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1)To gain Economic growth
Economic growth
Situation ---- An increase in Output, Income and Expenditure over a period of time.
Increased in GDP.
Measured by Gross domestic product (GDP).
GDP
Total value of goods and services produced in a country in one year.
Feature of economic growth (Boom)
1)Increased in GDP --- increase in Output / Income / Expenditure
2)Inflation --- increased in income --- can buy more --- price increased
Trade cycle or Business cycle or Economic cycle (4 types of economic situation)
A. Recession, B. Slump, C. Recovery (economic growth), D. Boom
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a) Recession
Decreased in Output, Income, Expenditure over the period time.
Reduction in GDP, period in the economic / trade cycle when GDP fall.
b) Slump (deep recession)
An deeply decline in Output, Income and Expenditure over a period of time.
Decreased in GDP.
c)Economic growth
An increase in Output, Income and Expenditure over a period of time.
Increased in GDP.
d)Boom
Rapidly increased in output, income , expenditure over the period time.
High level of economic activity associated with a rise in GDP.
Consequences of economic growth (effect on business)
Advantages
1)can get more profit ----- Income increased --- D for g&s increased (can buy more) ---
firm sales& production increased --- profit increased.
2)become larger ---- income increased --- can buy more ---- Firm sales and profit increased
--- reinvest for expansion ---- become larger.
Disadvantages
1)less competitive ---- employment increased --- increased in wages and salary ----- cost of
production increased --- raise the price ---- less competitive.
2)decreased in profit ---- income increased ---will buy more --- price increased --- cost of
production increased ---- less profit.
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2.) To attain low level of inflation
Inflation
A rise in the general Price Level over a period of time.
Reduction in Purchasing Power.
Measured by “ Consumer price index “ (CPI) (RPI)
Negative consequences on firms
1)Pressure on profit margin ----increase in price of material ---- increased in cost of
production --- get lower profit --- delay expansion and growth
2)Less competitive with foreign rival firm---increase in wages ----- increased in cost of
production --- need to charge high price --- demand decreased / loss of sales.
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3.)To get low level of unemployment
Unemployment
When people are out of work and cannot find a job.
(actively seeking the job but cannot find it.)
Measured by unemployment rate = number of unemployed x100 = %
Total workforce in the economy
Consequences of unemployment on firms
Advantages
1)Profit will be increased ----- pool of unemployed labour increased ---- wages decreased ----
cost of production decline ---- can get more profit.
2) more competitive ---- unemployed labour increased ---- wages and salary decreased ----
cost of production decline --- can reduce the price ---- more competitive with foreign rival
firms.
Disadvantages
1)can get less profit --- due to unemployment increased ---- income decreased --- D for g&s
decreased (less buy) --- sales decreased ---- profit decreased
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4.) To gain balance of payment (Export = Import)
Balance of payment
The import is equal to export.
Export ( X) = Import (M)
BOP Surplus (improved)
Export > Import
BOP Deficit
Import > Export
Export
goods and services sold to overseas (other countries)
Import
goods and services bought from overseas.
Visible trade = Visible balance = Balance of Trade
Trade (buy and sell) in physical goods. Eg car
Invisible trade
Trade in services. Eg Tourism
Balance of Trade (visible balance).
the difference between visible exports and visible imports
Balance of Payment == Balance of Trade
All X = All M Goods only X = Goods only M
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Exchange rate
The Price of one currency in term of another
Exchange rate Depreciation
declined in value of currency
Exchange rate Appreciation
increased in value of currency
Exchange rate Depreciation (consequences) on the business
Disadvantage
Price of M expensive --- price of imported RM increased ---- Cost of production increased
--- Profit lower or need to raise the Price --- less competitive.
Advantages
Price of X g&s cheaper ---- D for X increase (will buy more from other countries) ----
X increased -- more sales revenue.
Exchange rate Appreciation (consequences) on the business
Advantage
Price of M goods cheaper --- price of material decline ---- cost of production decreased ---
Profit high or can reduce the Price ---- more competitive
Disadvantage
Price of X g and s expensive --- D for X decreased ---- X decline --- less sales and profit
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Advantages of Export (sell to overseas)
1)Increase potential sales --- local + overseas ---- sales and profit increased
2) gain EOS ---- sales/ output increased ---- Average cost decline --- Profit high or
can reduce the Price --- more competitive.
3)Currency issue--- if ER depreciation --- price of X goods cheaper --- D for X goods
increased ---- Sales and profit increased
Less dependent on domestic sales ---- if product is reached at maturity stage in home market,
consumers in other countries might think that this is an up to date product. (one of the
extension strategies)
Disadvantages of Export
1)Currency issue ---- if ER Appreciation ---- price of X good expensive ---- D for X goods
decreased ---- Sales and profit decreased
2)Protectionism (Tariff) ---- tax on M goods ----- Product become expensive --- D for goods
decreased --- sales and profit decreased
3)Extra cost will be higher --- eg high transport cost --- Profit lower or need to increase
the Price --- less competitive.
(Overcome --- franchise to local manufacturer to make products for its own local market)
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Advantages of Import (buy goods and services from overseas)
1)currency issue --- if appreciation --- price of M goods cheaper --- cost of production
decline --- Profit high or can reduce the Price --- more completive
2)more choice --- can get high quality good ---- improve image and reputation
3)lower price ---- competitive advantages
Disadvantages of Import
1)Currency issue --- if ER depreciation ---- Price of M goods expensive --- cost of
production increased ----
2)protectionism --- tariff --- tax on M goods ----- RM become expensive --- cost of
production increased
3)high cost ---- transportation cost increase ---
Use locally produce Raw material
(+) lower in transport cost ---- cost may be lower ---- profit increase / can reduce the price
(+) quicker --- reduce delay production --- customer satisfaction ---- image increase
(-) give up competitive advantage --- rival firms will use same RM --- no different (not
unique) ---- cannot raised the price
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To achieved economic objectives, government use
1)Fiscal policy
2)Monetary policy
3)Supply side policy
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1)Fiscal policy
Using changes in taxation(T) and Gov: expenditure (G) to manage the economy.
G > T ---- Budget deficit
T > G ---- Budget surplus
Gov; expenditure (G) ---- Eg Infrastructure, Health, Education
Taxation (Gov --- Revenue/ income)
a) Direct tax
Tax on income of individual and firms.
Eg: Income tax, Profit tax (sole trader/ partnership) or Corporation tax (Company)
b) Indirect tax
Tax on expenditure and purchase of goods and services.
Eg Value added tax (VAT), Tariff ( tax on M goods)
Consequences of Increase in rate of tax (effect on Business)
1)If Direct Tax (income tax) increased ----- lower disposable income ---- less money to
spend and save ----- demand (buy) decrease --- fall in firm’s sales/ profit
2)If Gov Direct Tax (Corporation Tax) increased ---- less profit --- reinvest for expansion x
--- larger x
3)If Indirect Tax increased --- cost of Material increased ---- cost of production increased
---- Profit lower/ need to raise the Price --- less competitive
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Disposable income
income after tax.
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2)Monetary policy
Using changes in Interest rates and the Money supply to manage the economy.
Aim to control inflation.
Interest rate
borrowing cost (Cost of borrowed money)
Interest rate set by Government or Central Bank.
Money supply
Total value of money circulating in the economy.
Consequences of High interest rate (effect on Business)
1)For firm-------High Cost of borrowing ----- Cost production increased
need to rise selling price --- Less competitive --- buy less --- sales decline Or
Profit may be lower ----- reduce to pay dividend (unhappy for SH--- withdrew their
investment) and/or delay investment.
2)For consumer----cost of borrowing increased --- borrow decreased ----reluctant to spend
more ---- Demand (buy) lower ---- sales and profit decreased.
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Supply side policy
Designed to increase Aggregate supply (AS) in the economy.
Support labour market, capital market and goods and service market.
(1)Labour market
a)Set labour market regulation
(1) MWR ---- labour income increased ---- motivation increased ---- Output / productivity
increased
(2)H&S regulation ----- safe working environment ---- Death and injury decline ---
compensation decline / image and reputation increased
(3) Discrimination Act ---- fair treated to employees --- job satisfaction ---- increased output /
productivity
b)Give Training and Education --- skill increased /quality of labour increase --- Labour
mobility ---- output / productivity increased --- gain EOS
(II)Capital market
to increase investment ---- Privatization
Helping small firms
Tax incentive(reduce) /subsidies & grant
Tax reduce / provide subsidies ----- cost of production decline --- get more profit ---
expansion and growth --- output / productivity
(III)Goods market
to increase competition (set competition policy, free trade agreement)
encourage SME --- number of firms increased --- output / productivity increased
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Privitisation
Transfer of public sector (Gov) resources to the private sector.
Subsidies
Financial assistance given by government to firms in order to reduces their cost of
production.
Government should subsidize the firm?
(+) survival and growth --- cost of production decline --- profit increased --- reinvest for
expansion --- become larger --- gain EOS
(+) to protect employment --- cost of production decline --- profit increased --- reinvest for
expansion --- require more labour --- employment increased
(-) opportunity cost ---- spend for firms --- cannot spend for other purpose (infrastructure /
health/ education)
Conclusion
X --- not certain effective or not . (depend on skill and experience of the business).
Increase in tax burden tax payers.
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UK Consumer legislation (Consumer Protection Act)
1)Sales of Goods Act, 1979
This states that products sold by business must be of a merchantable quality and fit for the
purpose.
(+) protect against inferior quality (product with high quality)
(+) Right to return of faulty good
2)Food safety Act, 1990
This states that food should be fit for human consumption and comply with safety
standard.
(+) protect against the sales of harmful goods
3)Trade Descriptions Act, 1968
This law is designed to prevent business from making false claims about the performance of
their products.
(+) protects against indecent advertising
4)Fair trading Act, 1973
This stated that a monopoly is said to exist if a business has at least a 25% market share.
(The act set up the Office of fair Trading (OFT) whose responsibility it is to oversee all
policy relating to competition and consumer protection.)
5)The competition Act, 1988
Outlaws agreements, carters or practices which prevent, restrict or distort competition.
(It also set up the competition Commission which carries out enquires into mergers and anti-
competitive practices.)
(+) protect against misleading price / price control (Price genuine)
(+) more choice --- satisfaction / improve SOL
Benefits of consumer protection laws (effect on Consumers)
1)Right to return of faulty goods --- customers can get high quality product
2)Genuine sales price ---- affordable --- improve SOL
3)No false description
4)No misleading advertisements --- consumer get right information about the product
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Types of markets
1)Perfect competition Identical product are traded (e.g. petrol/salt/rice)
2)Monopolistic competition similar products are traded
3)Monopoly one seller but many buyers
4)Oligopoly small group of firms are grouped and many buyers
Competition
The rivalry that exist between firms when trying to sell goods to the same group of
customers.
Increasingly competitive market
A greater number of business producing products aimed at the same market segment
.
Monopoly
Where one business dominants the whole market
One seller and many buyers.
Barriers’ to entry
Obstacles that make it difficult for new firms to enter a market.
High Barriers to entry
Difficult to enter into the market
Low Barriers to entry
Easily enter into the market.
Anti-competitive practices or restrictive trade practices
An attempt by firms to prevent or restrict competition
Anti-competitive practices ---- consequences (Monopoly disadvantages on consumers)
1)Increasing price --- cannot affordable --- decreased in D (less buy) ---- decreased in SOL.
2)Restricting consumer choice --- customer dissatisfaction
3)Poor customer service --- Raising barriers to entry --- less competitive and no market
sharing --- will provide poor customer service
Monopoly advantages
1)Increased in innovation ---- Monopoly firm get abnormal profit (high profit) --- reinvest in
R and D ---- produce innovative products ---- SOL improved.
2) Gain EOS --- being they are large firm --- gain EOS --- average cost decline ---- can
reduce the price ---- more affordable for consumers
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Ways to encourage more competition
1)Introduce anti-competition legislation eg Fair Trading Act / Competition Act
2)Encourage the growth of small firm (SME) ---
3)Lower barriers to entry ---- Gov: tax reduce, give grant and subsidies and information
about the market.
Competitive market
Many sellers and many buyers in the market
Advantages
1)Low price--- affordable --- can buy more
2) More choice --- customer satisfaction
3)Production innovation ---- increased in SOL
Better customer service
Disadvantages
1)reduced quality ----Hidden costs----- need to reduce cost ---- use low quality RM/ Lab
2)Hard sell by putting pressure on customer to buy --- disaffection for consumers
3)Too much choice can be confusing to customer
Reasons for encourage SME (small and medium enterprise)
1)Job creation (To increase employment) ---- increased in Job opportunities --- income
increased --- gain Economic growth.
2)To increase competition----- number of seller high ---- for consumers less price and more
choice ---- satisfaction.
3)Can get international competitiveness ----Small firm may grow into larger firm---- get
EOS --- cost decreased--- can reduce the price ---- long run international competitiveness.
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International aspects
Globalization
The growing integration of the world’s economies.
(situation ---- world economies --- integrated)
Multinational (MNC)
A large powerful business with markets (trading) and production facilities in several
different countries (in many countries)
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Why have multinationals been created? (driving force/ Reason) (Adv of MNC itself)
1)To gain Economies of scales --- Can access to cheap global resources (L L K)--- reduce
cost of production --- can reduce the price ---- more competitive.
2)To gain larger Market ----- use heavy advertising and innovative marketing --- attract
customer globally ---- increased sales/ profit
3)Technical and financial superiority --- Can afford to invest heavily in R & D / Can afford
to employ the most talented people available –-- can provide innovative g&s
4)risk diversification --- if loss in one area but can increased in sales at other area --- reduce
risks
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Effect of multinationals (Globalization) on Firm
Advantages
1)Job creation ---- Increase employment and income --- D for g& s increased --- firm sales
increased
2)Transfer of technology ---- MNCs will bring new technology ---- firm become more
development--- can produce innovative products
Disadvantages
1) increase in competition --- reduce market share --- sales decreased --- profit lower
2)difficult to maintain labour --- MNCs can pay high w&s --- resigned and join with MNCs
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Effect of Multinationals on Economy/ Gov /on Host countries
1) Job creation---- increased in employment ---- income increased ---- D for g&s increased
--- improve SOL
2) Increase in tax revenue --- can spend more in I/H/E ---- gain economic growth and SOL
improved
3) Improvement in the quality of human capital---- MNCs provide training and education ---
increased in skilled/ multi skilled --- can get high w & s
Disadvantages
1)pollution ---- firm produce pollution --- health problem --- occur neg: externalities (EC)
2)depletion ---- Firm extract non-renewable recourses --- used up --- run out --- resource
depletion --- unsustainable development.
3)exploitation ---give Low wages, child labour, poor working condition --- decreased in SOL
4)Repatriation of profit --- MNCs returns the profits from an overseas venture to the
country where it is based.
Recommendation
in order to reduce damaging the environment --- Gov should set environmental R & R
To reduce exploitation to employee --- Gov should set R & R (eg MWR, H&S)
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International trade
Traded (buy and sell) between nations (countries)
Free trade
Traded between nations that is completely without Gov: restriction (intervention).
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Reasons why countries trade with each other
1)cannot produce domestically ---- lack of the resources (LLK) needed for such production.
2)can be bought more cheaply --- can access cheapest resources ---- cost of production
decline
3)To sell off surplus commodities --- sell to overseas --- Export increased ---- Balance of
payment surplus
4) To improve consumer choice ---- customer satisfaction ---- SOL improved.
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Benefits of free trade (international trade)
Effect on consumers/ economy
Advantages
1)More consumer choice --- customer satisfaction ---- SOL improved
2)reduced price ---- due to Increase in competition ----- to keep cost down---- reduce the
price --- can access cheaper price and produce high quality goods and be more innovative
Disadvantages on consumers/ economy
1)Confuse to customers
2)lower quality --- Hidden cost ---- reduce quality --- dissatisfaction
3)increased unemployment ---- Infant domestic firms ---- cannot compete ---- collapsed (shut
down) -----employees lay off --- increase unemployment.
Conclusion (Recommendation)
Gov should set R and R (eg sales of goods Act)
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Effect on Firm
Advantages
1)Growth --- if domestic market become saturated, by selling in oversea can generate more
sales and more profit
2)Less risk --- risk diversification --- sell at different markets (have different taste and
fashion ) --- reduce risk of failure
Disadvantages on firm
Increased in competition --- need to reduce the price ---- can get less profit
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Trade barriers
Measures designed to restrict trade
Protectionism
An approach (methods) used by government to protect domestic producers and encourage
the exporting firms
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Methods of protectionism (ways to increased import control )
1)Tariff
A tax on imports (M)
tax imposed on Imported goods ---- M goods become more expensive --- D for M decline
(less buy for M goods).
Advantages
Price of M goods expensive ---- D for M good decline ---- M decline --- local good D
increased.
Disadvantages
Price of M (major RM) expensive ---- Cost of production increased ----- Profit decline / need
to raise the Price ---- less competitive.
Conclusion
Tax revenue increased ---- Gov can spend more on I /H/E --- improved the status of the
country.
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2) Quota
A physical limit on the quantity of imports allowed into a country
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3) Subsidies
Financial assistance given by Government to domestic producers in order to reduce their
cost of production ---- local firms can reduce the price ---- more competitive or
Profit increased --- reinvest for expansion ---- become larger --- gain EOS
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4) Administrative barriers
Imported goods apply strict regulations and specification -- for importer compliance cost
high --- can get lower profit --- reduce M
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5) Devaluation of exchange rate
depreciation of currency ---
price of X good cheaper
price of M goods become expensive ---- X > M
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Home country
The domestic country where a multinational (MNCs) start/ first establishes its operations
Host country
The foreign country where a multinational set up its operations.
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Trade bloc
A group of countries that trade with each other and are usually part of a free trade
agreement. Eg EU
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Sustainable development
The idea that people should satisfy their basic needs and enjoy improved living standards
without compromising the quality of life of future generations.
(Products can be made without having a detrimental effect on production in the future)
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Social enterprise
A business with social objectives that reinvests most of its profit back into the business or
into benefiting society at large.
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Pressure groups (interested in society and environment)
Groups of people without political power who seek to influence decision makers in politics,
society and business.
Pressure groups use (impact on business)
1)Demonstrations ***
A group of people protesting about a business’s actions or policy, either at a rally or outside
the company’s offices. ---- damage image and reputation.
2)Boycotting ***
Refusing to buy a business’s products or services and trying to influence other consumers to
do the same. ---- decreased in sales and profit.
3)Petitioning ***
Making an oral or written official complaint to the government or concerned authority on
an issue---- Gov will order to stop the activities --- occur loss
4)Increasing awareness of the issue ---- This is done through the pressure group’s website
and possibly causing negative publicity with the help of the media.
5)Lobbying---- Attempting to influence policymaking of the government.
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Business ethics
Moral principle
Ideas, in business, about what is morally right or wrong.
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Unethical behavior (eg)
1)wastage --- disposed off --- unpacked
2)labour exploitation ---- long working hour / poor working condition / low wages /
appoint child labour
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Advantages of ethical behavior
1)Can attract the investors ---- Improved image and reputation --- attracting new investors
---- increased in investment --- become larger
2)Can attract the employee ---- no exploitation to labour ---- increased in motivation ----
employee loyalty --- more commitment/ innovation.
3)Can attract the customers --- eco-friendly products and treated fairly ----- improve brand
awareness and recognition --- increase in sales/ profit
Disadvantages
1)Cost of RM high ----will use high quality RM --- increased in cost of production ---- need
to raise Price ---- less competitive
2)Costs of labour increased ---- improving working conditions and better pay (above MWR )
--- increased in cost of production --- get low Profit.
Conclusion
In short run --- cost may be higher but
In long run --- improve in image ---- sales and profit will be increased.
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Ethical issue for business
1)charging fair price to customers
2)paying a fair wage to employee / not employing child labour
3)not harming the environment
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Stakeholder
An individual or group which has an interest in a business because they are affected by its
activities and decisions.
(individual or group of individual who interested in the activities of business)
1)Internal stakeholder (inside the organization )
Owners (shareholders) , managers, employees
2)External stakeholder (outside the organization )
Lenders, suppliers, customers, government, local community
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Stakeholder Objectives (interest )
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1)Owners/ To receive high return/ growth (expansion), wealth creation
Shareholder Return on their investment in the business
(Owner of Company) To benefit from an increase in share value. (capital gain)
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2)Managers To have job satisfaction and status. (chance of promotion)
To receive a fair salary (high pay) that reflects their
contribution to the business’s success.
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3)Employees To have job security
To receive a fair wage that reflects their contribution to the
business success.
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4)Lenders To receive interest payment when due
To have borrowing repaid by the due date (maturity date)
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5)Suppliers To receive prompt payment for goods supplied on credit
To be treated fairly and not be forced to reduce their prices
by business with strong buying power.
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6)Customers To receive quality goods and after sales services
To be charged a fair price which gives value for money
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7)Government To be paid the correct amount of taxes on times
To have minimal spending on unemployment benefit
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8)Local community To receive benefits for the local economy such as
employment and subsiding community facilities (improve
infrastructure)
pollution ( neg externalities)
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Externalities: Costs and Benefits
Social cost
The cost of an economic activity to society as well as the individuals and firms.
These are divided into private costs and external cost.
Social cost = Private cost + External costs(negative externalities)
Private costs
The cost of an economic activity to individuals(consumers) and firms.
Negative Externalities (External cost)
The spillover negative effects on 3rd party.
Eg
1)pollution (noise, air, water) --- health problem ---- decline in SOL
2)Traffic congestion ----- time to travel increased ---- delay / increase stress
3)resource depletion --- non-renewable resources (crude oil)--- used up ---run out ---
unsustainable development.
destruction of an area. , overcrowding
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Social benefits
The benefits of an economic activity to society as well as to the individual and firm.
These are divided into private benefits and External benefit
Social benefit = Private benefit + External benefit (positive externalities)
Private benefit
The rewards to individuals or firms of an economic activity such as consumptions or
production.
Positive externalities (External benefits)
The spillover positive effects on 3rd party.
Eg
1)Job creation ----- income increased ---- D for high quality goods and service --- improve in
SOL
2)training and education ---- skill increased --- job opportunity increased (wages and salaries
increased) ----
3)R&D ---- innovative products ---- quality of life improved.
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4)gov tax revenue increased --- can spend more on I H E --- country status improved.
new technology. site development.
Government policies to deal with externalities
A government will want to discourage economic activity that result in negative
externalities and encourage those that result in positive externalities.
Ways to deal (reduce) negative externalities (EC)
1)Government set rules and regulation
Due to R and R ---- cost of production (compliance cost) increased ----- get less profit
-------------- business reduce their production --- can reduce EC.
(Regulation relating to global warming, contaminated land , abandoned mines, national parks,
air quality and waste.)
2)Taxation
Increased in tax ---- production cost increase --- price also increase --- demand decrease ---
EC (pollution) decrease.
Increased in tax ---- Production cost increased ---- less profit /loss occur ---- so reduce the
production ---- can reduce EC.
Eg: a tax is imposed on a firm that produces damaging emissions.
3)Subsidies
Financial assistance given by government to firms to purchase new machine ------ pollution
decline --- decline in EC
(Government offer grants, tax allowances and other subsides as an incentive to reduce
externalities.)
4) Awareness campaign
Providing the knowledge about the negative effect--- more awareness --- D/ S decline ---
reduce EC
Fines
Fines are imposed on those who damage the environment.
Other measures
Eg the London Congestion Charge --- introduce --- try to reduce congestion
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Needs for government to protect the environment
1)Promote sustainable development --- to protect against deforestations (depletion)
2)To reduce pollution – health problem ---- can occur negative externality ---- decline in
SOL
3)To satisfy stakeholders. Eg pressure group and tourists
4)global warming --- change the climate --- can destroy the world
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Should use recycled material
Reduce EC ---- pollution will be decline ----
Sustainable development
Should not use recycled material
Cost may be higher than benefit
May not suitable for
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