Economic Environment

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Economic Environment

Businesses must consider the impact of changes in the economic environment. There are many factors in the economic environment which can affect a business’ strategic and functional decision making:

Gross Domestic Product

Gross Domestic Product (GDP) is the value of goods and services produced by a country during a certain period.
- Changes in GDP can affect a business’ decision making as GDP growth is likely to coincide with an increase in demand which businesses must respond to.
For example, in a GDP boom, a business may make a strategic decision to diversify and enter a new market.

Taxation

Taxation refers to the tax paid by businesses on any profits made.
- Changes in taxation can affect a business’ decision making. For example, increased taxation will reduce profit after tax which can affect strategic investment decisions.
- If there is less money left over to invest, then the business is likely to have to prioritise better.

Exchange rates

Exchange rates are the value of one currency expressed in terms of another currency.
- Changes in the exchange rate can affect the decision-making process of a business which imports from or exports to a country with a different currency.
For example, if Lidl imports goods from Spain, and the Pound Sterling weakens against the Euro, the price of imports will increase in Pounds. This will affect the decisions made about order quantities and selling prices.

Inflation

Inflation refers to the general increase in price levels and the reduction in the real value of money.
- Changes in inflation can affect the decision-making process of a business because rising costs may mean that a business has to increase its prices to maintain its profits at the same level.

Government policies

Fiscal policy refers to the use of government expenditure and taxation to influence demand.
- Changes in government expenditure and taxation can increase or decrease demand which businesses may need to respond to.
Monetary policy refers to the controlling of money supply and interest rates to control economic activity.
- Increasing interest rates may affect business decision making as consumers may increase their savings and therefore decrease spending which can affect demand for a business’ products.

Trade

Open trade and protectionism refer to the ability of countries to trade either with or without barriers to trade.
- Protectionist measures can reduce international trade which can affect a business importing and exporting goods and services.
For example, banana sellers are affected by protectionist measures governing the trade of bananas and this affects supply and cost.

Globalisation

Globalisation is the increasing trend for individual markets to become unified and worldwide.

Advantages of globalisation

Globalisation offers businesses opportunities to expand and target international markets.

Disadvantages of globalisation

Globalisation increases competition for local businesses and this can reduce market share and sales revenue.

Advantages of targeting emerging economies

Targeting emerging economies can help a business to extend the product life cycle for its goods and services.
Emerging economies offer business new markets to target which can increase sales volume.
Emerging economies offer businesses increased access to labour resources often at a reduced cost compared to the labour market in the business’ home country.
- For example, a clothing manufacturer can benefit from offshoring production to an emerging economy as labour may be cheaper.