Cambridge International AS and A Level Business

Worksheet Answers – Chapter 9

Economic external influences (A Level)
KG Manufacturing (KGM) is located in country X and produces components for the car industry. It exports
80% of its output, while 45% of the materials it uses are imported. The demand for cars is income elastic. KGM is
currently profitable.

1 ■ More workers looking for employment – it might be easier to recruit replacements for workers who leave/retire.
■ Wage increases might be lower due to excess supply of labour – helping to keep cost of components under control.

2 ■ Boom means rising GDP and living standards.

■ Boom is likely to increase the demand for cars and the components needed to make them – BUT only 20% of
output is sold in country X so the impact might not be great.
■ Boom means falling unemployment – so labour shortage might exist and wages might have to increase to recruit/
retain workers – the impact of this depends on proportion of labour costs out of KGM’s total costs.

3 Depreciation will give opportunity for KGM to reduce export prices – this is particularly important for KGM as 80%
of output is exported. This could increase demand for KGM components from foreign car makers and make them
more competitive.
Import prices are likely to rise – this is important for KGM as 45% of materials are imported. Impact on total costs
and profits of KGM depend on the proportion of total costs made up by imported materials. If low, the overall
impact on KGM profits might be low too.

4 Increased corporation tax on profits would hit KGM as it is profitable – this will reduce retained profits and KGM will
have less internal finance for investment.
Increased income tax will reduce demand for cars – but country X only accounts for 20% of KGM’s output so impact
might not be that great. Workers might demand wage rises to compensate for falling disposable incomes caused by
higher taxes.

5 Raise finance abroad – possibly to invest in foreign component makers. This would diversify KGM’s production and
make them less affected by interest changes in country X. BUT there will be communication/management problems
from having operations in another country.
Work with car makers to develop cheaper cars which will be less affected by higher interest rates (consumers often
buy cars on credit). These cheaper components/cars might be expensive to develop and it might not be worthwhile
if interest rates fall after several years.

6 ■ Higher costs of labour and materials/services bought by KGM in country X. This is likely to lead to KGM having to
increase prices, which could reduce demand, especially from foreign car makers.
■ Foreign component makes might now become more competitive compared to KGM and take market share from
it, both within country X and in other markets.

© Cambridge University Press 2014 Cambridge International AS and A Level Business Worksheet Answers – Chapter 9 1