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Economic Change

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Business Studies

The external environment of a business is made up of various factors. For now, let's take a look at how economic change can impact business decision-making. This is one of the 'E' elements of PESTLE analysis (see Figure 1 below). The economic environment includes factors like economic growth and economic policy and can either be a source of opportunity or a threat to the business.

Economic Change, PESTLE Analysis, StudySmarterFigure 1. PESTLE Analysis, StudySmarter

Economic Change Business Definition

Economic change can be defined as a shift in structure, policy or growth in the economy, and can be considered as one of the external factors that affect business decision-making.

Factors Influencing Economic Changes in Business

All businesses operate in an economic environment - they do not have a choice or control over this. Economic change is important for businesses to keep in mind because it can be directly related to the demand for goods and services in a market (ie consumer spending). Economic change in business can come from various different factors such as:

  • Changes in GDP

  • Exchange rates

  • Interest rates

  • Taxation

  • Government spending

  • inflation

  • Policy changes

Economic growth

Economic growth is one of the most important factors of the external environment as it can impact consumer spending, investment and government expenditure. The size and attractiveness of the economy are constantly changing. One of the ways to measure this change is by looking at the gross domestic product (GDP).

Gross domestic product (GDP) measures the total output of the economy over a certain period of time.

You can calculate GDP with the following formula:

GDP = C + I + G + (X - M)

C: Consumer spending

I: investment

G: Government expenditure

X: exports

M: imports

Consumer spending or consumption in general, measures the amount of money consumers have spent on goods and services. Investment measures how much was invested in businesses within a country's economy. Government expenditure measures how much the government has spent on public services and infrastructure.

Net exports (XM) measures how many goods and services we exported abroad (X), and from this value, we subtract the number of goods or services we imported into the country from abroad (M).

With this formula, we can measure the actual growth of an economy. We can look at the yearly percentage increase of a country's GDP to measure economic growth. Economic growth is important because, in general, it means we are better off in our environment.

Advantages and Disadvantages of Economic Growth

Some of the advantages of economic growth include:

  • Higher living standards

  • The creation of jobs and lower unemployment

  • Increased investment

  • Increased tax revenue

Some of the disadvantages of economic growth include:

  • Risk of inflation

  • Increase in the income gap

  • Negative externalities

Economic Changes and the Business Cycle

The business cycle represents the value of economic output and activity.

Changes to the business cycle have a significant impact on business decision-making. When the economy is experiencing an upswing, existing companies are more likely to invest in new product development and operate at maximum capacity. New businesses are also more likely to be founded during an upswing.

During a recession, unprofitable businesses are likely to stop their operations altogether and unemployment may start increasing. Firms are also more likely to try and enter international markets where demand for their goods and services is higher.

Impact of Changes in Economic Policy on the Business

Economic policy has a huge impact on how an economy functions. Changes in economic policy will have a significant impact on business decision-making. We will look at protectionism and fiscal policy to explore this further:

Protectionism

Protectionism is a restriction imposed by a country's government on the import and export of goods and services.

Protectionism impacts the open trade of goods and services. Protectionism can be in the form of trade barriers. Some common forms of trade barriers include:

  • Tariffs: a tax or duty that has to be paid on certain imports of exports (ex. Country X imposing a 5% tax on all imports of oranges)

  • Quotas: a limit to the number of goods and services allowed to be imported or exported (ex. Country X only allows a maximum amount of 100,000 units of a certain good to be imported into the country)

  • Subsidies: an amount of money granted by the Government to help local businesses (ex. Country X grants orange farmers money to keep the price of oranges low and competitive)

Fiscal Policy

Fiscal policy is a direct factor influencing economic growth, as it is made up of taxation and government spending.

If fiscal policy is expansionary - where taxation is decreased and Government spending increases - the output of the economy will grow. This is beneficial to businesses, as a prosperous economy increases consumption and investment.

If fiscal policy is contractionary - where taxation is increased and government spending decreases - the output of the economy will decrease. This can be a disadvantage to businesses, as an economic decline will decrease consumer spending and discourage investment.

Economic Change - Key takeaways

  • Economic change is one of the external factors that affect business decision-making.
  • Economic change can be defined as a shift in structure, policy or growth in the economy.
  • You can measure economic growth by looking at GDP.
  • GDP = C + I + G + (XM)
  • With this formula, we can measure the actual growth of an economy. We can look at the yearly percentage increase of a country's GDP to measure economic growth.
  • Protectionism is a restriction imposed by a country on the import and export of goods and services.
  • Fiscal policy is dependent on taxation and government spending.

Economic Change

Economic change can be defined as a shift in structure, policy or growth in the economy. All businesses operate in an economic environment - they do not have a choice or control over this. Economic change is important for businesses to keep in mind because it can be directly related to the demand for goods and services in a market (ie consumer spending). Economic change can come from changes in inflation, exchange rates, policy or economic growth. 

Changes in the economic environment affect all business decision making. For example, if an economy is experiencing growth, firms are more likely to start expanding, as customers are spending more and investment is increasing. This could impact marketing decision making, as economic growth implies a good time to diversify, innovate, invest in new product developments and large marketing campaigns, as the firm is more likely to have access to a wide range of capital and resources. 


Economic changes can have significant impacts on strategic decision making. For entrepreneurs, new business opportunities are created when the economy is growing. As the economy is experiencing an upswing, entrepreneurs are more likely to have access to a wider range of resources and funds to start their business compared to when the economy is experiencing a slump or a recession. 

Final Economic Change Quiz

Question

How do you measure economic growth?

Show answer

Answer

By looking at the percentage growth in GDP.

Show question

Question

What is the formula for measuring the output of an economy? 


Show answer

Answer

GDP = C + I + G + (X - M)

Show question

Question

Define economic change.


Show answer

Answer

Economic change can be defined as a shift in structure, policy or growth in the economy.

Show question

Question

Which of the following is not included in the GDP formula? 

  1. Consumption 

  2. Investment 

  3. Growth 

  4. Exports 

Show answer

Answer

C.

Show question

Question

Which of the following is not a factor that can change the economic environment? 

  1. Interest rates 

  2. GDP 

  3. Fiscal Policy 

  4. Strategy

Show answer

Answer

D.

Show question

Question

Name two of the advantages of economic growth. 


Show answer

Answer

  • Higher living standards 

  • The creation of jobs and lower unemployment

Show question

Question

Name two of the disadvantages of economic growth. 


Show answer

Answer

  • Risk of inflation 

  • Increase in the income gap

Show question

Question

What is the business cycle and why is it important?


Show answer

Answer

The business cycle represents the value of economic output and activity. Changes to the business cycle have a significant impact on business decision-making.

Show question

Question

Which of the following statements is correct? 


I. During an economic upswing, companies are likely to operate at maximum capacity. 

II. During a recession, firms might try to enter international markets.

Show answer

Answer

Both statements are correct. 

Show question

Question

During which stage of the business cycle are new businesses most likely to appear? 

  1. Recovery 

  2. Recession 

  3. Slump 

  4. Boom 

Show answer

Answer

A.

Show question

Question

During which stage of the business cycle are new businesses most likely to appear? 

  1. Recovery 

  2. Recession 

  3. Slump 

  4. Boom 

Show answer

Answer

A.

Show question

Question

What is protectionism?

Show answer

Answer

Protectionism involves the imposition of certain restrictions to open trade.

Show question

Question

Name two types of trade barriers.


Show answer

Answer

Tariffs and quotas.

Show question

Question

Name an example of a tariff. 


Show answer

Answer

An import tax or duty.

Show question

Question

What is a subsidy?


Show answer

Answer

A subsidy is an amount of money granted by the Government to help local businesses.

Show question

Question

What influences can fiscal policy have on economic growth?


Show answer

Answer

Fiscal policy impacts taxation and government spending. If taxation is high and government spending is low, the output of the economy is more likely to decrease. If taxation is low and government spending is high, the output of the economy is more likely to increase, creating economic growth.

Show question

Question

What is the economic environment?

Show answer

Answer

The economic environment is one of the external factors that influence the decision-making of a business.

Show question

Question

Name two examples of economic factors. 


Show answer

Answer

  • GDP

  • inflation 

Show question

Question

What is the business cycle? 


Show answer

Answer

The business cycle (also known as the economic cycle) is an important tool for understanding economic activity. It represents the value of economic output and activity. The business cycle is made up of four main parts.

Show question

Question

Which of the following is not a phase of the business cycle?

Show answer

Answer

Decrease

Show question

Question

What happens during the recession phase of the business? 


Show answer

Answer

A recession can be characterized by slower economic activity. Investors are not as confident in the economic environment and spend less. Consumers also decrease their spending which leads to lower profits for businesses. Unemployment also rises as businesses cut back on expansion and production.

Show question

Question

What happens during the recovery process of the business cycle?


Show answer

Answer

Recovery is characterized by things getting better in the economy. Consumers and investors are more confident and increase their spending. As a result, unemployment also starts decreasing.

Show question

Question

What is the highest point of an economic boom called?


Show answer

Answer

The peak.

Show question

Question

What is the lowest point of a slump known as?


Show answer

Answer

The trough.

Show question

Question

What is one of the characteristics of economic growth?


Show answer

Answer

An increase in GDP.

Show question

Question

What are the two types of taxation? 


Show answer

Answer

Direct and indirect taxes.

Show question

Question

Which of the following statements is correct? 

  1. Corporate taxes are a form of indirect tax. 

  2. VAT is a form of indirect tax.

Show answer

Answer

Only statement II. Is correct.

Show question

Question

Name two examples of direct taxes.


Show answer

Answer

  • Income taxes 

  • Corporate tax 

Show question

Question

During inflation __________. 

Show answer

Answer

There is a continual increase in average prices in the economy. 

Show question

Question

What are the two different aspects of fiscal policy?


Show answer

Answer

Taxation and government spending.

Show question

Question

How could an increase in VAT impact the business environment?


Show answer

Answer

An increase in VAT will decrease consumer spending, as consumers now have to pay higher prices when purchasing goods and services. Certain industries will be affected more than others, depending on the price elasticity of demand for the product. For example, consumers will continue purchasing necessities even if their prices increase.

Show question

Question

What is globalization?

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Answer

The OECD defines globalization as a term that “is generally used to describe internationalization of markets for goods and services, the means of production, financial systems, competition, corporations, technology and industries. (Source: https: //stats.oecd.org/glossary/detail.asp? ID = 1121)

Show question

Question

How does globalization impact the business sphere? 


Show answer

Answer

Globalization encourages interdependence.

Show question

Question

How does globalization impact international business? 


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Answer

  • Encourages global competition 

  • Allows for businesses to access growth markets 

  • Investment in emerging markets 

  • Allows for the movement of labor and resources

Show question

Question

What is a multinational corporation? 


Show answer

Answer

They are large companies (corporations) that operate in various locations globally.

Show question

Question

What is an example of a multinational corporation?


Show answer

Answer

Ex. Deloitte

Show question

Question

Name two advantages of globalization. 


Show answer

Answer

  • Movement of labor and resources

  • Consumers get to enjoy a wider range of products and services 

Show question

Question

Name two disadvantages of globalization. 


Show answer

Answer

  • Could lead to exploitation 

  • Tends to benefit large companies more than smaller businesses 

Show question

Question

Which of the following is not an advantage of globalization? 

Show answer

Answer

More profitable for large businesses

Show question

Question

What is one of the main problems with globalization? 


Show answer

Answer

One of the main problems with globalization is exploitation and inequality.

Show question

Question

What type of exploitation have certain MNCs been accused of in the past? 


Show answer

Answer

Certain MNCs have been accused of paying unfair wages (very low wages) in order to decrease the prices of their products and stay competitive. In addition to unfair wages, exploitation also takes form in terrible working conditions and the exploitation of the environment as a result of pollution and damage.

Show question

Question

How could we tackle problems with globalization?


Show answer

Answer

The OECD has set out three objectives to tackle these problems. These policies include promoting transparency and cultural integrity; empowering small businesses and people; and promoting a new form of global integration to avoid exploitation.

Show question

Question

What is an interest rate?

Show answer

Answer

An interest rate can be defined as the price of borrowing money. It is also the benefit you get when saving your money in a bank.

Show question

Question

What is the base rate of interest in the UK? 


Show answer

Answer

Currently, the base rate of interest in the UK is 0.1%. 

Show question

Question

Why has the base interest rate been set so low in the UK? 


Show answer

Answer

The base rate has been set quite low in the UK in order to encourage consumption and investment.

Show question

Question

Name an example of when you would be charged interest. 


Show answer

Answer

When using a credit card or when borrowing money from a bank.

Show question

Question

What are two factors that would affect the interest rate you pay? 


Show answer

Answer

The term of the loan and the risk associated with your loan.

Show question

Question

What is monetary policy? 


Show answer

Answer

Monetary policy is a type of government policy that influences an economy's interest rates or money supply to change the level of output in the economy. The government can increase or decrease the rate of interest by changing the base rate of interest.

Show question

Question

Which of the following statements is correct? 


I. When interest rates increase the cost of borrowing money increases. 

II. When interest rates increase the cost of saving money increases. 

Show answer

Answer

Only statement I. is correct. 

Show question

Question

Small firms are often _________. 

Show answer

Answer

More affected by interest rates than larger firms. 

Show question

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