Component 3 Flashcards

Buying and selling exports and imports between countries

International trade conducted without the existence of barriers to trade e.g. tariffs and quotas

Trade between countries is restricted through measures to reduce the number of imports coming into the country e.g. tariffs and quotas

Tax on imported goods coming into a country making it more expensive

• Protect domestic industries

• Protect domestic employment

• Prevent dumping (selling goods at less than cost price by foreign producers to drive domestic producers out of business)

A trade agreement where there is free trade between member countries but those outside the bloc will be subjected to protectionist measures

A single market is a type of trading bloc that goes beyond the free trade of free goods and services. May involve free movement of labour and capital

ADV:

• Help businesses access the best technologies, products and services in the

• Can choose cheaper or higher quality suppliers outside the domestic market

• Opportunity to become a market leader I'm the industry do interest

• They have the ability to exports their goods to foreign markets without being exposed to tarries/quotas allowing them to increase sales revenue and economies

• Lower tariffs on UK exports will enable a higher quantity of exports UK 🇬🇧jobs and economic growth

DISADV:

• Small domestic businesses may struggle to compete with the price of goods imported from other countries

• Foreign Goods are substituting domestic goods so domestic manufacturers may lose business

• Foreign exchange loss to country by exporting goods

• Discourage local manufacturing and may cause inflation

• Competition can intensify

• Export products subject to quality standards

ADV:

• Deter unfair competitive practices such as dumping

• Increases price of foreign products causes them to purchase domestic goods

• Creates jobs for domestic workers

DISADV:

• Competition can be beneficial for business

• Tarrifs discourage foreign businesses from businesses from investing in the domestic country

• Gives domestic businesses an opportunity to create a monopoly

ADV:

• Increase sales

• Spread risk

• New potential markets

• Create strong brand awareness globally

• Economies of scale

• Take advantage of legal differences and differences in cost of production compared to UK

• Innovation

DISADV:

• People all over the world have different needs, priorities, incomes and tastes

• Cultural differences

• Exchange rate factors

• Distribution problems

• Management focus

• Different legal such as consumer protection or health and safety standards

• Language barriers

Globalisation is the process of deeper economic integration between countries and regions of the world, resulting in more interdependent economies

Factors contributing to globalisation:

• Improved communication technology

• Deregulation of markets and reductions in barriers to trade

• Quicker and cheaper transport

• Consumers demanding more choice and more willing to purchase foreign products

Describes a country in the process of rapid economic growth and industrialisation e.g. BRICS (Brasil, Russia, India, China). They have a growing middle class with more disposable income so have a higher demand for goods and services

They represent large untapped markets for many Western businesses.

Winners:

• Consumers have greater choice of goods, at a better quality and for a cheaper price

• Developing countries- Increase wealth by producing goods for export

• Developed economies- Experienced low inflation because of falling prices of imports

• Businesses who trade internationally- Benefit from increased sales, spreading of risk, new potential markets, expanding brand awareness, economies of scale, reduced costs due to choice of location, innovation

Losers:

• Unskilled workers in Western economies- Real wages falling or jobs being 'relocated' to low-cost economies

• Previously viable businesses who have been out competed by low cost competition from overseas

• Workers in developing countries- Exploited by large businesses

• Environment- Excessive development led to deforestation and flooding. Increase in transport= global warming

A business which makes adaptions to its products, services, marketing activities and working practices to ensure they meet the requirements of consumers in different markets

ADV:

• Enhances firms success

• Global awareness of brand

• Avoid ethical issues/costs

• Market oriented approach

DISADV:

• Expensive

• Must be constantly aware of changing consumer tastes

• Time consuming

Organisation which have multiple production or service operations in at least two countries.

ADV:

• Increase market share if at saturation point in domestic market

• Secure cheaper premises and labour

• Avoid tax or trade barriers

• Government grants to move operations into country

DISADV:

• More difficult to monitor facilities and can lead to inadequate safety of employees etc.

• Labour costs in developing countries is increasing so MNC's having to move to lower labour cost countries which causes disruption and ethical issues

• Diseconomies of scale

Social benefits:

• Provide large amount of employment

• Provide goods and services that consumers wish to purchase

• Can pass on benefits of economies of scale to customers

• Invest large amounts into R&D to produce products which benefit consumers

• Pay taxes to local government

Social costs:

• Smaller local businesses struggle to compete

• May use transfer pricing to avoid paying tax in some countries

• May exploit workers in less developed countries

• Negative effect on environment e.g. BP in Gulf of Mexico

• Threat to local culture

The EU was set up in 1957 as an economic and trade organisation to increase cooperation between European countries. 27 member countries.

The EU is based on four freedoms: Free movement of goods, free movement of services, free movement of labor and free movement of capital. Other features of the EU include:

• No barriers of trade or transfer of resources between member states

• Common tariff system

• Free transfer of resources

• Consistent standards from one country to another

ADV:

• More control over immigration

• Freed from EU laws and regulations

• More control over trade

• Save on EU membership cost

• Weaken pound against euro to benefit exporters

DISADV:

• Labour shortages as no more freedom of movement of labour= restrict supply to market

• UK exporters still need to abide by EU legislation when selling into EU

• No longer benefit from trade deals with EU

• EU no longer provide funding to UK, which benefited businesses either directly from EU subsidies, or indirectly through development of infrastructure

• Weaker pound makes imports more expensive which is passed onto consumers

Advantages:

• Bank of England able to set interest rate which is regarded as key weapon in UK governments armory e.g. lower interest rates to encourage spending and help economy get out of recession

• No initial changeover costs of joining Euro

Disadvantages:

• Pay commission to bank every time businesses want to convert £ into Euros

• Less price transparency

• Exchange rate fluctuations create element of risk for UK businesses

• Restricted access to size of market

Demand for all goods and services produced in an economy.

Monetary policy uses interest rates to influence the economy The main aim of monetary policy is to help keep macroeconomic stability in the economy and to maintain the value of money

Decrease= Consumers spend rather than save, borrowing becomes cheaper, aggregate demand increases Objective to create high employment and economic growth

Increase= Consumers save rather than spend, borrowing becomes cheaper, aggregate demand decreases. Objective to create stable, low inflation

Fiscal policy is the use of government spending, taxation and borrowing to affect the level and growth of aggregate demand, output and jobs

Uses:

• Boost total spending in the economy when there is unemployment e.g. spending on new hospitals= more jobs= increase in income and expenditure

• If inflation in economy due to demand, fiscal policy used to reduce demand in economy e.g. reduce government spending

• Raise taxes or cut spending on imports if there is a current balance deficit

• May try to redistribute income by spending money or reducing tax on low income groups to give them more disposable income

Taxation is the charges that the government makes on the activities, earnings and income of businesses and individuals

Uses:

• Pay for government spending on a variety of public sector activities

• Affect factors in economy e.g. inflation/unemployment

Income tax- Tax levied directly on income. Affects disposable income of households. Taxed at a progressive rate so marginal rate of tax rises at certain boundaries of taxable income

National insurance- System of compulsory payments by employees and employers to provide state assistance for those who are sick, unemployed or retired

Corporation tax- Tax levied on companies profits

Capital gains tax- Tax levied on profit from sales of property or investment

Inheritance tax- Tax levied on property or money acquired by gift or inheritance

Value added tax (VAT)- Consumption tax added to price of goods or services. Set as a percentage of the price of a good. Usually directly affects the selling prices of products bought

Customs duty- Tax imposed on imports and exports of goods

Excise duties- Tax charged on goods produced within the country and tax on production or sale of particular goods e.g. tobacco and alcohol

Council tax- Tax levied on households by local authorities based on estimated value of a property and number of people living in it. Pays for local services

Business rates- Tax on business properties so those who occupy non-domestic properties contribute towards the cost of local services

Transfer payments- Welfare payments made to benefit recipients such as the state pension or job seekers allowance

Current spending- Spending on state-provided goods and services that are provided on a recurrent basis e.g. NHS salaries, resources for state education and defence etc.

Capital spending- Infastructure e.g. roads, hospitals, motorways

-Provide goods and services that would be underprovided if left to the private sector (merit goods) -Also used to stimulate demand in the economy -Key purchaser of some goods or services provided by businesses e.g. UK defence contractors, shipbuilders -Fund public services

An amount of money given directly to businesses by the government to encourage production and consumption

Reasons for:

• Encourage output and investment

• Achieve more equitable income distribution

• Reduce cost of training and employing workers

The cost of borrowing money and the reward for saving

Increase:

• Overheads increase

• Business wish to pay suppliers quicker to avoid being charged interest

• Customers less likely to borrow money

• Customer's existing borrowing becomes more expensive

• Less disposable income for customers

OPPOSITE FOR DECREASE

A sustained increase in the average price level of a country

Two causes: Demand pull inflation- Occurs when total demand for goods and services exceeds total supply so businesses raise price. Associated with boom phase of business cycle Cost push- Occurs when firms increase price to maintain or protect profit margins after experiencing rise in costs of production e.g. rise in wages, raw materials

• Increased costs of raw materials, wages, energy etc. May be passed onto customers

• Discourages investment as creates uncertainty

• Shoe leather costs (firms search around for best price on items)

• Menu costs (firms constantly changing price lists because of increased costs

• Wage negotiating by employees

Deflation is a general fall in price levels

It can lead to:

• A decrease in wage levels

• Value of debts increase relative to value of assets and income

• Expenditure discouraged so demand falls

Exchange rates are the price of one currency against another currency. They influence the price of imports and exports

Firms purchase foreign currency to:

• Pay for goods and services bought from overseas

• Invest in foreign companies

-Imports become cheaper therefore higher profit margins. Firms may also look to decrease selling price to become more competitive

-Exports become more expensive so firms must increase selling price abroad making them less competitive or leave selling price the same and experience a decrease in revenue

OPPOSITE FOR £ DEPRECIATING

Strong Pound Imports Cheaper Exports Dearer

Economic growth is an increase in the value of goods and services produced by an economy over time, usually resulting in a rise in average living standards, creation of new jobs and lower unemployment. For businesses should result in increased profits, improved business confidence and increased capital investment. For government this should mean increased tax revenues used to fund more spending on government services

Value of goods and services produced by an economy over a specific period made up of 4 elements:

• Consumption

• Investment

• Government spending

• Net exports

The business cycle shows the fluctuations of economic output in a country and is measured by looking at changes in GDP from one quarter to the next

Downturn- Less investment by businesses and business owners. Managers become more nervous about future and may start to cut back. Higher inflation so interest rates may increase. Less spending and unemployment increase. Economy may still to grow but at much slower rate

Recession- Economy shrinks in size. Recession is two consecutive quarters of negative economic growth, often caused by insufficient aggregate demand for goods and services within the economy. Rapid increase in unemployment, falling demand and investment, high levels of inflation and interest rates. Demand generally falls and likely to be redundancies. Businesses cut back on investment and levels of stock. Product ranges and pricing strategies change to suit new economic environment. Small businesses may close as they run out of cash

Recovery- Business and consumer confidence still low but demand may increase. Investment will increase but stay low. Unemployment stays high until businesses are sure that recovery is set to continue. However new jobs are creates and unemployment falls and consumers start to spend again.

Boom- Business confidence increases so investment of firms will increase investment into new machinery etc. to increase output. Increase in consumer demand so firms may be competing at full capacity to meet increased consumer demand. Economy may experience full employment which means businesses may struggle to recruit suitable labour in sufficient numbers, leading to poaching. If economy is unable to meet increased demand, demand pull inflation will occur. High consumer spending and confidence, increased investment by businesses and low unemployment

Cyclical- Demand is closely linked to GDP and business cycle e.g. electrical goods, fashion retailers Counter-cyclical- May benefit from economic downturn e.g. value retailers. pawnbrokers

When someone who is ready, willing and available to start work is unable to find employment

Frictional unemployment- Unemployment due to people moving between jobs e.g. new entrants to labour market. Both unavoidable and desirable so that job vacancies can be filled

Structural unemployment- Appears when there have been large changes in patterns of demand or developments in technology which have caused long term unemployment in regions or industries e.g. robotics replacing jobs and unemployment caused by foreign competition

Cyclical unemployment- Appears as part of business cycle. As economy enters downturn, unemployment increases. Involuntary due to lack of demand for goods and services

The way in which changes in society affect a business's activities Include:

• Demographic changes

• Lifestyle changes

The changing structure of the population e.g. size, age, characteristics, mitigation patterns, wealth

2 main demographic changes in UK:

• Growing population

• Aging population

A change in society and people's lifestyles e.g. changes in tastes and fashions, technology and media consumption, decreasing family sizes, concerns for sustainability and health

Lifestyle changes have provided businesses with many opportunities and threats:

• Number of working women increased and are therefore economically active. Supermarkets focused on convenience and childcare industry boomed as household budgets increased

• Society more health conscious

• Change in how younger people consume media and purchase goods. Moved away from TV and onto streaming platforms and social media

• Cultural changes

• Fashion changes

• Attitude towards environment

• Increase in lone parent families

• Marriages between opposite sex couples fallen

• Young people living with parents increased

Automation is using robotics to carry out repetitive tasks e.g. self checkouts, robots that manufacture cars

ADV:

• Lower employee costs

• Increased productivity

• Less management time spent in disputes and negotiations

DISADV:

• Greater environmental impact

• Social costs

• Costs of investment

• Less flexibility

• Internet marketing- Internet sales increasing year on year

• Web-based customer relationships- More than 4000 bank and building society branches closed in UK

• B2B (Business to Business)- Finding commercial buyers for business output and sourcing components and raw materials over the internet

• Manufacturing resource planning 2 (MRP2)- Used by manufacturing businesses to plant all aspects of business activity. Takes forecasts and turns them into a series of objectives and targets for each function and department in business

• Electronic point of sale systems (EPOS)- Reading of bar codes at checkouts and a linked stock database that controls ordering and stockholding for retailers

• Shorter product life cycles as can develop and bring products to market much quicker

• Outsourcing and relocating 'back office' operations worldwide as cost of operations much cheaper than in UK e.g. call centre

• Outsourcing production- Quality can be remotely monitored and large businesses can reduce financial risk by letting other manufacturers manufacture products for them

ADV:

• Easy price comparisons and more information

• More choice

• Lower prices

• Improved quality

• Convenience

DISADV:

• Fraud

• Call centre disruptions

ADV:

• Reduction in costs as employees can be replaced by machinery

• Improved quality as machines more precise and consistent than humans

• Increased productivity

• Reduce waste

• Improve working environment as technology has made it safer, work more easier and tolerable

DISADV:

• Initial costs may be high aswell as high maintenance, redundancy and training costs

• Breakdowns/IT problems

• Automated production lines are interdependent (if one part of the line breaks down, the whole process may stop

Ethics are moral guidelines which govern good behaviour. An ethical business is one that considers the needs of all stakeholders before making a decision

Employees- Should be treated as most valuable asset e.g. taking care of health and safety, good working conditions, fair pay. Legal consequences for those who do not comply. Those working for suppliers should also be equally as important

Suppliers- Sticking to agreed contracts, not forcing renegotiation, paying on time, not putting pressure on supplier's cash flow, use ethical suppliers

Customers- Customers want a quality product or service at a fair price. Businesses which act unethically fail to fulfil this moral commitment to customers

Local community- Should be aware of impact on local community e.g. pollution, litter, using local suppliers

The government- Duty to adhere by laws set by government, comply with legislation, pay correct amount of tax

Free market view- Business's primary responsibility is to maximise profit for shareholders

CSR- Businesses have duties and obligations to go beyond generating profit for shareholders. Need to monitor and take responsibility for the impact they have on social welfare and the environment. May be due to fear of environmentalist and consumer pressure groups or the media, and concern for public image. Can sacrifice some profit in the short term but can pay off in the long run

Supply chain- Business only deals with companies that are sustainable. Consider ethical implications, environmental implications and distances involved in transportation

Production- Consider amount of energy used in process, make production more efficient, reduce waste, recycle

Packaging- Use more environmentally friendly, recyclable packaging without compromising quality

Distribution- If firm has own fleet, consider upgrading to greener vehicles. Subsidies available for this

Administration- Offices tend to only produce lower levels of emissions but remain vital in any sustainable strategy. Can use energy saving features on equipment, office recycling and printing policy

A sustainable business has no negative overall impact on the environment

Businesses can become sustainable by:

• Minimizing or eliminating the use of hazardous chemicals and processes that produce harmful by-products

• Using reusable/recyclable packaging

• Switching to more sustainable suppliers

• Using more energy efficient equipment/ using renewable sources of energy

• Eliminating unnecessary activities

• Lobbying: Meeting and discussing issues with decision makers e.g. government ministers, senior managers

• Direct action

• Gain as much publicity as possible: Gain positive media attention as possible which can bring public onto their side

• Legal action: May fight cause through the courts or questioning legality of proposed actions

ADV:

• Improved business and brand reputation

• Recruitment of employees who commit themselves to ethical company objectives

• Greater customer loyalty as growing number of ethical customers

• Avoid legal penalties

DISADV:

• Costs may increase e.g. processing waste, more sustainable suppliers. HOWEVER some practices may lead to reduced costs e.g. switching off lights

• May need to change production techniques/materials

• R&D spending may increase

Company law ensures a firm the is incorporated (LTD/PLC) is a separate legal entity independent of directors and shareholders

Examples:

• A company's property belongs to it and not to directors/managers. Prevents misuse of assets

• A company is responsible for its own debts and liabilities. Shareholders and directors cannot be forced to pay them

Impact on business/shareholders:

• Creates more competitive business environment, however may slow down business ventures e.g. mergers

Employment legislation is designed to protect the interests of employees within the workplace

Examples:

• Minimum Wage Act 1998

• Equality Act 2010: Unlawful to discriminate against anyone at work because of age, disability, gender, race, religion etc.

• Employment rights: Employees have to be provided with contract of employment within two months of starting which must state levels of pay, holiday entitlement, rights for maternity pay, pension rights, disciplinary procedures and length of notice period. Also protected against unfair dismissal

• Health and Safety at Work Legislation: Employers have responsibility to ensure wellbeing and safety of employees. Employees also have responsibility to take care and abide by health and safety rules

Impact on business/shareholders:

• Must keep up to date with changes in law

• Increased costs due to minimum wage, holiday and sick pay, etc.

• Staff have legal rights to request flexible hours from their employer

• Treating staff fairly may lead to an increase in motivation

This legislation is designed to protect the interests of consumers when making purchases of goods and services. Ensures businesses act fairly towards their consumers

Examples:

• Sale and Supply of Goods Act: Goods must be of satisfactory quality

• Trade Description Act: Goods and services must perform in the way advertised by the business

• Consumer Credit Act: Protects customers when borrowing money or buying on credit

Impact on business/stakeholders:

• Additional costs to business

• Must create fair marketing activities

• Affect business-to-business practices closely connected to customer e.g. trader supplying fair trade food products will need to ensure its labelling complies

Competition Policy focuses on controlling the abuse of market power of big business. Designed to control monopolies and restrictive practices within a market. Government believes competition results in better quality goods and a wider variety of products

Examples:

• Fair Trading Act 1973: Defined what constitutes a monopoly (25% market share)

• Competition Act 1998: Prohibits agreements, cartels or practices which prevent, restrict or distort competition

• Competition and Markets Authority (CMA): Work to promote competition for benefit of consumers

Impact on business/stakeholders:

• Benefits SME's

• Fines for those who break law

Controls how your personal information is used by organisations, businesses or the government

Businesses should make sure the information is:

• Used fairly and lawfully

• Used for limited, specifically stated purposes

• Used in a way that is adequate, relevant and not excessive

• Accurate

• Kept for no longer than necessary

• Handled according to peoples data protection rights

• Kept safe and secure

Intellectual Property Law covers the legal rights of individual and companies in regard to designs, inventions and artistic works

Features:

• Trademark: Covers designs and artwork such as labelling, brand logo design and product design

• Patent law: Covers inventions and stops others from making, using or selling invention without permission from owner

• Copyright law: Gives creator of literacy, dramatic, musical and artistic works rights to control the way their information is used

• Changes in size of a business

• Change in ownership

• Introduction of new technology

• Changes in leadership

• Changes in social behaviour and consumer tastes

• Government

• Changes in workforce/flexible working processes

• Competition

• Changes in economy e.g. business cycle

• Changes in technology

Change management involves the process that ensures a business responds to the environment in which it operates

Step management- Dramatic or radical change in one fell swoop. Quick so may require some coercion Incremental change- On-going small, gradual change which takes place as part of an organisations evolution and development. Less coercive and more inclusive

Employee preparation- May involve reskilling to enable employees to carry out new tasks effectively or need for recruitment so business has workers with new skills or managers who can force the pace of change

Increased R&D expenditure- This develops new products, methods of production and technologies

Additional capital investment- Change can create the need for investment in new technology and equipment. Often expensive and undertaking

1. Imposed Total Package (biggest shock, resistance. Autocratic)- Change is implemented all in one go. Done by senior management and no consultation or negotiation with employees e.g. downsizing

• Very little decision time needed

• Only works in culture where employees willing to accept directions from managers without question

2. Imposed Piecemeal Initiative- Change still implemented without consultation or negotiation with employees but implemented in stages

• Gives time for workers to adapt to changes

• Longer implementation time

3. Negotiated Total Package- Change first negotiated and consulted with employees but implemented all at once. Involves trade unions/worker groups and likely to offer improvements/rewards in working place as incentive

• Happier workforce

• Very hard to achieve, long time to implement

4. Negotiated Piecemeal Incentives- Gradual implementation of change, workers and managers consult and agree on various changes as needed.

• Happier workforce

• Very hard to achieve, numerous talks=delays

• Workers fear unknown

• Affect working relationships

• Employees and managers fear unemployment if can't carry out new tasks

• Managers may lack skills/expertise to manage change successfully

• Owners may not want to pay cost of change

• May go against culture of business

• Discussions with those affected by the change

• Attempt to prevent misinformation and rumours

• Keep employees informed about changes

• Training so employees can cope with new operations

• Ensure that organisational culture fits in with new operations and organisation

3 steps:

1. Unfreezing- Creating motivation for change by making people realise change is necessary as many people naturally resist change. Communication especially important as the more we know about change and the more we feel it is necessary and urgent, the more motivated we are to accept the change

2. Changing- A process where the organisation must transition or move into this new state of being. Education, communication, support and time are critical for employees as they become familiar with the change

3. Refreezing- Establishing stability once changes have been made. Positive rewards and acknowledgment of individualized efforts are often used to reinforce the new state

Quantifiable- Can be measured e.g. loss of overseas sales due to exchange rate Unquantifiable- Cannot be measured e.g. adverse effect on company image if product isn't successful

• Failure of equipment/technology

• Employee error (due to lack of training)

• Skilled staff leaving

• Public relations (e.g. Tesco horsemeat)

• Injuries through hazards in workplace

• Product failures

• Supply problems/price increases

• Economic factors e.g. Brexit

• Legal changes

• Competitor activities

• Natural disasters

• Terrorist activities

Insurable risks are risks that can be protected under insurance coverage An uninsurable risk is a risk that an insurer will not take on

The process of understanding and minimising what might go wrong in an organisation. It involves the activities undertaken by a business which are designed to control and minimise threats to the continuing efficiency, profitability and success of its operations

1. Identification and analysis of risks to which the organisation is exposed to

2. Measurement of the likelihood of the risks occurring

3. Assessment of potential impacts on the business

4. Deciding what action can be taken to eliminate or reduce risk

• Taking out insurance

• Training staff appropriately

• Regular backing up of IT systems

• Robust quality assurance systems

• Install sprinkler/ fire extinguishers

Contingency plans are prepared in recognition of the fact that things do go wrong from time to time. The aim is to minimise the impact of a foreseeable event and to plan for how the organisation will resume normal operations after the crisis

A physical restriction on the number of goods coming into a market to reduce supply of limit amount of foreign imports available

Crisis management is where a firm puts in emergency measures to deal with an unforeseeable disaster/event that threatens to destroy or severely disrupt in a major way to the continued operation of normal business activities

Uninsurable risks are more difficult to manage as the probability of the risk occurring is impossible to quantify, so insurance companies are unable to price the risk