Economic environments

Unit 1 P5

IntroductionI am going to describe the influence that contrasting economic environments have on the activities that a business carries out. I will explain the different types of economy, economic indicators, what the government can do to change the economy Including the Fiscal and Monetary Policy. I will explain what these terms mean and give examples. I will compare the difference between the economies of China with the economy of Britain. I will explain the economic cycle, state of demand, level of inflation, CPI of the countries, the GDP and the changes in condition of supply. I will then compare the information and the operations. Finally I will explain what the most important factor is when operating.

The types of economyThe economic system is what describes the organisation of a countries economy. The scarcity needs to be taken into account because it is a problem and the country needs to distribute the resources in amounts that will allow the businesses to operate and would not leave the country with a very low amount of resources. In an economic system three things have to be decided; what to produce, how to produce, and for whom to produce.

Traditional economy

A traditional economy is where the decisions are made based on the customs, beliefs and religious views of the community. In this type of economy the people that work have to do the same jobs that their parents did and will work using the same basis of operations to achieve what their parents will have wanted them to. In a traditional economy the community does not use money but use bartering to exchange goods and services for other goods and services. The people are expected to make what their ancestors made to follow the customs; they also have to make these in the same way. The goods that they produce are exchanged for other goods with the locals in the village. Traditional economies are common in places such as small villages within Africa, tribes, and places in India that use the caste system.

Command economy

In a command economy all of the decisions are made by the government, they decide the allocations of what resources they will give to factories such as raw goods and workers. The government also owns most of the property in this economy. There are government planning groups that decide on the prices that the produced goods and services being provided are going to cost and they also decide the wages that people receive. There isn’t a country that purely uses a command system but places such as Cuba and China are relatively close. Many countries have also found that this system is not very successful and have therefore abandoned it or are starting to abandon it. The goods produced are only sold to those that the government decides to give them to. This type of community has a communist government. Countries such as Germany and Russia had a command economy back in 1991 but they have now moved to a mixed economy.

Market economy

Lewis Appleton 1 Miss Johnston

Unit 1 P5

A market economy is where the prices of the products and services produced are decided by evaluating the supply and demand of them. The production rate of the products and the distribution amounts are also decided by the prices and profits. Most of the resources that are used to make the products are owned by private citizens. The decisions of the economy are made on the basis of a free enterprise which is the competition between the companies. Instead of the government answering the questions about the economy they are usually answered by individual citizens. The government does also not say what prices a business needs to set its goods at. The businesses themselves decide how to produce the goods and they are produced for consumers. As well as the command economy there is no country that uses a pure market economy but America is relatively close. If there was a pure market economy then the government would not be involved with any businesses and their operations, as well as this there would also be no legislation that protects the workers from unreliable bosses and there would be no rules that would enforce the protection of credit cards. This type of economy can be criticised because of the selfishness between the rich and the poor people. The market economy is also known as a free economy.

Mixed economy

Many countries use a mixed economy because it is suggested that it allows citizens to have the same fair amount of freedom that businesses do. The mixed economy is a combination of both the market economy and the command economy. It is said that all economies show characteristics of the other types of economies. In this type of economy most of the resources are owned by the businesses and the businesses themselves decide what and how they are going to produce. The government also lays down some regulations on certain companies. The goods and services are produced for the consumers. The UK is an example of a mixed economy although it is relatively close to a market economy.

Economy in BritainThe type of economy that Britain has is the mixed economy. In 2008 Britain entered a recession and it ended in late 2009. The economy in Britain is the sixth largest national economy in the world, this is measured by the GDP and it is the seventh largest measured by purchasing power parity (PPP). According to a report by the Global Financial Centres, London, as well as New York is the largest financial centre. This report was carried out on 21st April 2010. This was also verified by a report in 2008 by MasterCard Worldwide Centers of Commerce Index™. There was a news article on the Guardian saying that the economy needs a push. Nick Clegg insisted that he will make sure that the difficult decisions will be met “as fairly as possible” to prevent debt. George Osborne, the chancellor, stated that plans to eliminate the structural deficit in the economy by 2015-2016. The autumn statement states that there are three crucial things they need to provide the country with; stability, fairness and measures to boost growth. It was also revealed that the GDP of the UK will shrink until the second quarter of 2012 which would mean that the UK will have officially entered a recession. A recession is two consecutive negative quarters of growth. By 2013 the unemployment rate is expected to have risen to 9.1%.


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These charts describe what the top financial centres are.

Economy in ChinaChina has been reported as one of the biggest economies in the world, on the 14 th February 2011 there was a news article saying that China had overtaken Japan and became the world’s second biggest economy. The reason for this is because of the increase in manufacturing products in China. China has become one of the main trading countries for Japan. IMF did some estimates and found that China is ranked 93 for the highest GDP per head of population within different countries. The


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IMF is the International Monetary Fund. It is predicted that by 2035 China is going to overtake America as the largest economy. China is also the world’s largest market for the sales of cars and it uses the largest amount of energy. In January 2011 the trade surplus dropped in China due to high import demand. Despite China being a large economy the average person in the country is significantly poorer than those in Japan and they have less purchasing power.

Economic indicatorsIn an economy there are many economic indicators that have an impact on the market within the economy.

Consumer Price Index (CPI)

The CPI is what measures the increase in the inflation rate for different economies; it is based on a selected basket of products within that area. The produces in this basket will be things that are purchased regularly and are a necessity such as bread and milk. The CPI also includes the costs of living in a house but it does not include the house prices. The strengths of the CPI are that from it a prediction can be made about the future rate changes, this can easily be analysed, and it’s good for investor research.

Gross Domestic Product (GDP)

The GDP measures the price of all of the goods and services that are sold by the economy during a specified period. This includes the personal consumption, government purchases, private inventories, construction costs, and the trade balance. The GDP reports are detailed and can be difficult to understand. The GDP can be analysed to find the health of the economy and this good be a potential for investors. The strengths of the GDP are that it is one of the broadest indicators for the economy’s output and its growth; it takes inflation into account so it can be used for comparisons.


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What the government can do to affect the economy’s performanceThe government is able to do things that affect the performance of the economy. First of all depending on the taxation that the government has set it can decrease or increase the GDP. The more money that has to be sent to the government, the less that actually exists in the economy and the production rate will decrease, if all of people’s money went to the government then they would have a bare minimum rate of production, whereas if there was no taxes then people would spend more money in the economy and the GDP will rise. If the government were to increase the interest rates then consumer spending will decrease, therefore there is less demand for the goods and services that organisations offer. If the government spends more money to improve the economy such as better roads, housing and interest rates then the economy is able to spend more money but it may require a slightly higher rate of tax to cover the costs.

Fiscal policyA fiscal policy is where the government decides to increase or decrease the rate that they spend the taxpayer’s money and increase or decrease the taxation. This is done to try and influence aggregate demand. Fiscal policies have a purpose which is to first of all reduce the inflation rate, for example in the UK the government is aiming to reach a 2% inflation rate. A fiscal policy can also be used after two consecutive quarters of negative growth, known as a recession, this way they can try to stimulate growth of the economy. If the government is trying to increase the aggregate demand then they are trying to expand the economy, and therefore the government will increase the amount that they spend and cut the tax amounts to be paid. By doing this consumers are able to spend more money to increase the GDP, the government also worsens its budget deficit. If the government is trying to decrease the aggregate demand then they are trying to deflate the economy. To do this they will decrease the government spending and at the same time increase the taxes that need to be paid. This has its disadvantages because it prevents people from being able to put more money into the economy because it reduces consumer spending.

This article explains that China is going to continue expanding their fiscal policy because so far it has been successful at increasing its economic state; it is currently the second biggest economy in the world just behind America.


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Monetary policyThe government can use a monetary policy to try and influence an increase in the quantity of money available in the economy. The government can do this by producing more money into the economy and changing the interest rates. This policy is often carried out by the main bank, in England the monetary policy is set by the Bank of England. One of the aims of this policy is to influence a change in the inflation rate.

This news article explains that a country is trying to increase their rates using the monetary policy.

Economy differencesEconomic Indicator Britain China

GDP $2.480 trillion $6.983 trillionInflation 5.0% 4.9%GDP by sector agriculture: 0.9%; industry:

22.1%; services: 77.1%industry (46.8%), services (43.6%), agriculture (9.6%)

Unemployment 8.1% 4.2%Population 260,000 1.34 billion people

Economic cycle stageBritain

The UK entered a recession in Q2 of 2008, according to the UK Office of National Statistics (ONS) and exited it in Q4 of 2009. The revised ONS figures of November 2009 showed that the UK had suffered six consecutive quarters of negative growth. Currently Britain is in the stage of recovery.


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China

Currently China is in the stage of growth.

State of demand for businessCompetition

It is likely that the competition in China may be more difficult to handle because there are no laws in place that would stop other sellers from selling fake replicas or acting as they are another store. Tesco therefore may find it more difficult in China than in the UK because of the lack of laws. They also have some familiar competitors that they have in other countries such as Wal-Mart, one of the leading stores which create a high level of competition. The fact that there’s only about 1 car per 50 people in China means that Tesco needs to make the store more remote because people do not


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have the transport to use. Tesco has the problem of people creating fakes such as eggs which are made using cheap chemicals.

Tesco is well recognised in the UK as one of the largest retail stores there is; it has many competitors as there is a large amount of other retail stores in the UK. The biggest of Tesco’s competitors are Asda and Sainsbury’s. Both of these have their own unique things that help them compete; Asda offer different services such as smart price and their own range of clothing, they are also a subsidiary of Wal-Mart. Sainsbury’s focus on things such as healthy and organic food, they also have advertisements with Jamie Oliver which people aspire to and they therefore purchase the products. Tesco has to promote its products and show that they are of a better standard to compete with these stores.

Affordability of products

In China the price appears to be 1,001.38197 British pounds when converted which is a large amount more than the price of similar products in the UK. In the UK a television that is similar costs only £399 but this is most likely because there is a higher amount of disposable income in China and therefore more people can afford to pay the extra money. The average disposable income in China is actually about £4,000 a year.

Level of GDP

Britain: GDP growth 0.5%

The level of GDP in the UK has been rising and falling. The UK entered a recession in 2008 and exited in 2010. In the first quarter of 2011 the GDP was 0.5%.

China: GDP growth 11.40%

The level of GDP in China is rising rapidly in the past there was a large drop in 2007 by 5% but China has recovered from this and is currently the second largest economy.

Needs and aspirations


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Tesco has launched a service in China called member card. What this does is it allows the customers to be recognised by their language spoken in places where they might not be understood. This is to help make sure that the customer’s need of language is met. To satisfy customers Tesco has a different range of products such as coffee flavoured tea and donuts covered in pork floss. To satisfy the customers Tesco also tries to replicate things such as warm meat to show that the animal has recently been slaughtered and therefore the meat is fresh.

In the UK Tesco have many different methods they use to satisfy their customers and meet their needs, one of the biggest things they have is the Tesco Club card which allows customers to receive things such as vouchers and coupons as well as offers. There are over 13 million customers on the Club card scheme and it allows the customers to generally save money in Tesco stores. Tesco also have different sized stores that sell different products according to the local customers, this keeps the customers satisfied and interested in the products.

Region

Member

GDP (nominal)$Million

USD

GDP (PPP)

$Million USD

GDP per capita

(nominal) $USD

GDP per capita(PPP) $USD

HDI

Population

East Asia China 5,878,257 10,106,884 4,382 7,544 0.687 1,339,724,852

Europe United

Kingdom2,247,455 2,172,768 36,298 35,053 0.863 62,041,708

UK

In the UK a large amount of goods are obtained from imports, these cost slightly more money and include a higher rate of pay being made from businesses to obtain raw materials, however there is the advantage that the UK can trade more complex products at slightly cheaper rates because they are part of the Eurozone. In the UK there are copyright laws to prevent fakes being produced and sold by competitors, this is important because they do not exist within China. Compared to China the UK has a slower rate of growth which is only at 0.5%, this continues to fluctuate making it harder for businesses to predict their profits. Businesses in the UK produce and sell designer products to meet specific needs from their customers.

China

In China there is a cheaper rate of labour, more resources available in a fast supply, and raw materials being produced within the country itself. This generally makes it cheaper for people to afford goods as they are produced cheaper and therefore sold cheaper. The problem in China is that there are no copyright laws and many high valued items can be reproduced and sold at the same price as cheap fakes. The rate of growth in China is very high compared to the UK at 9.5%.


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Current level of inflationUK inflation rate

This graph shows the previous levels of inflation in the UK. It shows that during the war the inflation rate was as high as 25% and just after the First World War the inflation rate crashed to -15%, during the Second World War the inflation rate rocketed once again. This is possibly due to the need of items and money during difficult times, since then the inflation rate has continued to spike along the graph and is now at a smaller rate of spikes going into the year 2000. The rising demands made the inflation rate higher.

The current inflation rate in the UK is 5.0%.

China inflation rate


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This graph shows that China took a large dip in their inflation rate a while back but since then they have made a steady, but secured recovery in their economy and their inflation rate is at 4%.

CPI (Consumer Price Index)UK

(CPI) 5.0%

The CPI in the UK has been rising for a while and is not what the Bank of England is aiming to achieve, the CPI recently fell from 5.2% though. The UK government is aiming to make the inflation rate in the UK to be 2%.

China

(CPI) 4.9%

Recovering from a dip a while back, China is recovering slowly but securely from their dip and is slowly making their inflation rate rise. Their economy is expanding and more money is being produced in the economy.

Government policy in relation to business UK

The UK is aiming to reduce their inflation rate to 2% but they are having no success therefore it is a difficulty for small businesses to operate in the current economy because they are paying more for materials. As they are small they are making little or no profit to cover the costs of the materials. The inflation rate is also affecting larger businesses as they have to pay more money to their employees so that they are able to afford the basic supplies.

China


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China has a lower corporation tax than that in the UK and this makes it easier for businesses to help hold of their profits; they pay less to the government. There is also a lower VAT rate which makes it easier for businesses to get their raw materials that they require as they are cheaper.

GDPUK

The GDP in the UK was continuously rising for a long time but it recently took a drop. This may be from when the UK economy was slightly going into a recession.

China

The GDP in China has been rising at a very high speed for a while, the money started off being slow but then the economy rocketed up to nearly 10x the value in a very short amount of time.


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Changes in conditions of supplyUK

This shows the changes in conditions of supply for the UK. This shows that most of the supply being exported is goods at a rate of 13.2%.

China

Agriculture: 38.1%


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Industry: 27.8%

Services: 34.1%

These results show that the economy in China is focused on the agriculture and services. This means that the goods being produced are from those sectors more, rather than the industry sector.

Effect on my businessEconomic Indicator Britain China

GDP $2.480 trillion $6.983 trillionInflation 5.0% 4.9%GDP by sector agriculture: 0.9%; industry:

22.1%; services: 77.1%industry (46.8%), services (43.6%), agriculture (9.6%)

Unemployment 8.1% 4.2%Population 260,000 1.34 billion peopleTesco in the UK is able to operate much better, not because of the economy but because of the brand awareness they have. I will compare how the economy affects them.

Fiscal Policy

The corporation tax being decreased to 28% in the UK makes it easier for the Tesco to make a substantial profit as less money is taken away from their profits. Despite this China still has a lower rate at 25% which would save even more money, 3% may seem to be a small difference but it makes a big difference. For example if £100,000 was made in profits, 3% would be £3,000 which is enough for a lease on new machinery. The VAT is also higher in the UK and has recently risen to 20% this means that Tesco will make a smaller profit from the products they sell and pay more for the supplies they buy. The rate of VAT is only 17% in China which makes it easier for businesses to pay less and receive more.

Monetary Policy

In the UK Tesco has a chance to make a larger profit than operating in China, this is because whereas the interest rate is 6.5% in China, in the UK it is only 0.5% which encourages the use of loans and more spending. This means customers are persuaded to buy more items while shopping. The inflation rate in the UK is higher than China meaning that more money has to be paid to employees to keep them satisfied, this drives down profits and can have a bad effect on Tesco’s profits.

GDP

The market value of the economy in Britain is far less than in China. This means that it will be more beneficial for Tesco to operate in China because there is a possibility that they can make a higher rate of profit. There is also the factor that there may be more competitors as well which can make it harder for Tesco to operate.

Inflation


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The inflation in the UK is just above the inflation in China but the difference is unlikely to have little, if any effect on how Tesco will operate.

Unemployment rate

The unemployment rate in China is half of what it is in the UK. This means that more people in China are going to have more money to spend because they will have a secure income to dispose. The unemployment rate, as well as the population has a large effect on the profits that Tesco are able to make.

Population

Compared to China the economy in Britain is very small, therefore if Tesco were to operate in China, especially in a highly populated area they have a very high potential to make a large amount of profit.

ConclusionWe can see the contrasting economies and how different businesses are able to operate in them. Tesco can have one type of control within the economy in the UK and a completely different economy type within China.


Economy & Finance

Economic environments