THE ECONOMIC

ENVIRONMENT FOR
BUSINESS
Chapter 2
Outline of macroeconomic policy
Policy objective (ultimate aims)

Growth Inflation (low)

GIBE
BOP stability Employment
Policy instrument
- the tools used to achieve objectives
Instrument
Monetary policy Influences aggregate demand by
a) money supply
b) interest rate
c) credit controls
Fiscal policy Managing aggregate demand by
a) EXPENDITURE ,
b) PUBLIC BORROWING
c) INCOME
Exchange rate policy The strength and weakness of exchange rate will influence
a) Import & export
b) BOP
c) Interest rate
External trade policy a) Expenditure-reducing policies
b) Expenditure-switching policies
Fiscal policy
Fiscal policy 
- refers to the use of government spending and tax policies to influence economic conditions

Government need to plan :

a) What it wants to spend
b) How to raise income
c) Should borrow?

Component
Expenditure 1) Government need to spend money to provide services & goods
2) Giving grants to private companies
Revenues 1) Taxation
2) Direct charges to users of government services
Borrowing 1) Public sector net cash requirement (PSNCR) = amount that
government must borrow
Stimulate demand

Increased demand by reducing

Increase demand by directly
taxes
spending more itself
1) Allowing firms and individuals
1) Example : road, education
more after tax income to spend
2) This extra spending = financed by
2) This tax cuts can be financed by
higher taxes/borrowing
= borrowing

Functions of taxation:
1) To raise revenue for government
2) To cause certain products to be priced
to take into account their social cost
3) Protect industries from foreign
competition
Monetary policy
Interest rate
High interest rate

To reduce the money

supply through credit

Increase mortgage Deter some local Appreciation of the

Encourage savings payment (reduce investment and attract currency exchange rate
disposable income) foreign investor (export expensive)
Money supply
- medium term target

Raises prices and Raise demand (more

Increase in money supply
incomes spending)

QUANTITATIVE EASING
- Government print more money
to stimulate economy
Credit control

Minimum balances held by banks

- Increased reserved held by banks means less can be lent
to customers as credit so we have less to spend
Fiscal vs monetary policy
Exchange rates policy
Factors influencing exchange rate
Inflation Interest rate

BOP Speculation

Government
policy
Exchange rate
Exchange Impact
rate
increase 1) Cheaper imports
2) Cost of import become cheaper
- Reduction in domestic inflation

Decrease 1) Cheaper exports to overseas

buyers
2) Cost of import expensive
- Increase the domestic inflation
Fixed exchange rates
A fixed, or pegged, rate is a rate the government (central bank) sets and
maintains as the official exchange rate

A set price will be determined against a major world currency (Us dollar,
Yen)

In order to maintain the local exchange rate, the central bank buys and sells
its own currency on the foreign exchange market in return for the currency to
which it is pegged.
 Floating exchange rate
Floating exchange rate is
determined by the private
market through supply and
demand
Often termed "self-correcting,"
as any differences in supply A floating exchange rate is
and demand will automatically constantly changing.
be corrected in the market

Managed (dirty) floating :

Exchange rates are allowed to float, but from time to time authorities will intervene :
A) To use their official reserves of their foreign currency to buy their own currency
B) To sell their domestic currency to buy more foreign currencies for the official reserve
Influences which affect groups of
nation rather than single nation =
SUPRA NATIONAL BODIES

European union

The Union currently counts 27 EU

countries. The United Kingdom
withdrew from the European
Union on 31 January 2020.
 European Economic and Monetary Union
The European Economic and Monetary Union (EMU) involves the coordination
of economic and fiscal policies, a common monetary policy, and a common currency,
the euro among Eurozone nations

A common currency (EURO) A European Central Bank Centralized monetary policy

 Exchange rate and business
International trading companies can do a number of things to reduce the risk of suffering losses on foreign exchange
transactions including :

Hedging Invoicing in Activities can be

domestic currency outsourced to local market
(Japan and UK)
External trade policy
 Method to reduce BOP deficit/ Trade
deficit
Expenditure-reducing policies Expenditure-switching policies

a) Import controls such as tariffs or quotas

By shrinking the economy: b) Boost exports by reducing export prices
a) reduce expenditure on imported goods. c) Lowering the exchange rate
b) Reducing demand of imported goods
and services
c) Increasing interest rates to increase
savings and reduce expenditure on
imported goods
Competition policy
Market failure
- when the market mechanism fails to result in economic efficiency
(interaction between supply & demand)
Most appropriate policy response
Market failure Response
Imperfect competition State may intervene through minimum and maximum
price mechanism
Social cost Regulation :
A) Banning of smoking
B) Restriction of car use in urban areas
Imperfect information Regulation
Monopoly
-A monopoly refers to when a company and its product offerings dominate a
sector or industry
Merger
-A merger is an agreement that unites two existing companies into one new
company

In the UK, a referral may

be made to the
COMPETITION &
MARKET AUTHORITY
for investigation if the
merger will gain 25%
market share (lessening
the competition)
Restrictive practices
-Restrictive Agreements are anti-competitive agreements decided upon between two
bodies with the intent to distort the competition within the market, through either a written
agreement or an oral agreement
Restrictive practices
Dumping Price of product when sold in importing country is less than the price of
that product in the market of exporting country
Exclusive dealing Being bound by contract to only buy from or sell to one business
Price fixing Two or more businesses agree to sell at the same price
Refusal to deal Business refusing to use a certain vendor
Limit pricing Effectively a monopoly which is intended to discourage entry into the
market

Product are sold by a supplier at a price low enough to make it unprofitable

for other players to enter market
Retail price maintenance Reseller cannot set independent price
Government subsidies Deemed to be unfair to competitors
Deregulation / Liberalization
- main aim is to introduce more competition into an industry by
removing statutory or other entry barriers

Disadvantage
Loss of economies of scale
Lower quality or quantity of services
Need to protect competition
Privatization
-Privatization occurs when a government-owned business, operation, or
property becomes owned by a private, non-government party.

It generally helps governments save money and increase

efficiency, where private companies can move goods quicker
and more efficiently
Government assistance for business
Government incentives might be offered on :

Regional basis Selective national basis

The freedom of European

government to offer assistance
Giving helps to firms
is limited by European Union in
Help firms that invest that invest in area that
order to prevent distortion of
in an economically government would like
free market trade
depressed area to see developing more
quickly
Green policy
Green policy
-A Green Policy is your company's statement about the commitment
to sustainability and environmental management that your business is prepared to make.

• Commonly accepted practice that those who

Polluter pay produce pollution should bear the costs of
policies managing it to prevent damage to human health or
the environment

• Persuade polluter to reduce output and hence

Subsidies pollution
• To assist in expenditure to reduce pollution

• Go – green regulation
Legislation • Environmental law