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Unit 1 - P5 - The Business Environment
Essay of 4 pages for the course Unit 1 - The Business Environment at HSFC (Unit 1 P5)
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Xhuljan VUTHAJ 44975Unit 1 P5
P5: Describe the influence of two contrasting economic environments
on business activities within a selected organisation.
What is the Economy?
The economy is a system where by which a country tries to balance its available
resources which are land, labour, enterprise and capital. An economy tries to
balance its available resources against the wants and needs of consumers. The
economy is made of millions and millions of individual decision makers who buy
and sell goods, lend money, change the interest rate and raise/lower taxes.
There are three different types of economies which are mixed economies, market
economies and planned economies.
How can a countries economy Impact Businesses?
The state of an economy can have a huge impact on businesses depending on
what type of goods or services a business is providing. If an economy is in good
condition then businesses benefit from this because it means people are
spending money more which benefits businesses because it means people will
be buying more goods which will raise a business’s revenue which then leads
onto profit. During a strong economy disposable income is high, unemployment
is low and good consumer confidence prompts people to inject their money into
the economy through buying essential and non-essential goods and services.
During this period most business will try to expand by hiring more employees,
expanding retail space or even adding new lines of product but the problem with
this is that if the economy starts to fall then these businesses will suffer a lot.
In a weak economy most businesses suffer some sort of problems some serious
and some less serious but even in a weak economy some businesses still thrive
such as vehicle and property repossession businesses. Most businesses will
suffer during a weak economy because consumer confidence is bad and people
start to worry about their job security, which means they become more cautious
when it comes to spending, this leads to a decrease in revenue for businesses.
During a weak economy some businesses may still make profit but it may be a
slow process which will make it hard for them to pay back creditors. Businesses
are also forced to decrease the size of their business which limits their ability
customers, this leads to unemployment rising which furthermore slows down the
economy.
What is the Recession?
Recession is the term given to the period where real national output declines
over two successive quarters causing a decrease in the total volume of
production in the economy. A recession can be caused by several things but it
usually stems from economic authorities making policy mistakes which then
causes a problem. An example of this would be if the central bank might allow
the supply of money to grow too slow but yet they would keep interest rates
above the level needed to maintain a steady rate of growth. An increase in
interest rates can cause consumer spending to decrease because consumers will
have to be paying back more on the loan they’re taking. This can lead to
business closures and unemployment to rise due to the loss of jobs.
, Xhuljan VUTHAJ 44975
How did the Recession start and what effects did it have?
The recession started due to banks’ lending money, too quickly without making
sure if the people who are gaining the loan were secure enough to pay back the
money. Banks used this to push up house prices and speculate on financial
markets. Every time a bank makes a loan, new money has to be created. In the
period running into the recessions the banks created a large sum of money by
making loans. This meant that the debt and the amount of money in the
economy doubled. The money loaned out was used all over the place, 31% went
into residential property which caused house prices to rise faster than wages, a
further 20% went into commercial real estate which also played a part in the
increase in property prices, 32% went into the financial markets which eventually
crashed during the financial crisis, another 8% went into credit cards and
personal loans and only 8% went into businesses outside the financial sector.
All the money that the banks were lending caused the house prices to rise
alongside personal debt. Interest has to be paid on all the money that was being
lent which meant that debts were rising quicker than incomes which meant that
people were struggling to keep up with their repayments, which was not good for
the banks as some of them were in danger of going bankrupt.
Former Financial Services Authority, Lord Turner stated that the financial crisis
happened because “We failed to constrain the financial systems creation of
private credit and money”. After the recession banks reduced the amount of
lending and limited it to only businesses and households. The reduction in
lending caused the prices in these markets to drop.
UK’s Current Economic Situation
The UK is currently in a recovery period, as unemployment rates drop to their
lowest point since 2008 before the recession occurred and growth is slow but
growth is still present. The UK suffered a lot on during the recession as a lot of
people were left unemployed and so this meant people were saving a lot and not
enough money was being injected into the economy for it to start operating
correctly. This led to business and major retailers shutting down a lot of their
stores.
The UK’s GDP for the year ending 2013 stood at $2522.26billion which is was an
increase on the previous year where it stood at $2461.77billion. The UK’s GDP is
increasing as we can see which also means the standard of living in the UK is
increasing but compared to some of the other powerful countries such as the
USA, France, and Germany etc. Our GDP is quite below theirs.
Inflation as measured by the consumer price index has dropped to 0.3% in the
UK from 0.5%. This tells us that prices of goods are still increasing but increasing
by much less than they were before. The inflation is measured by looking at the
price changes in 700 goods and services in 150 different areas in the UK. In 2008
the inflation rate in the UK was 5% which is way above what the Bank of England
view as good. The Bank of England view 2% as an average inflation rate anything
above is a cause for concern and anything below isn’t good either. Having a low
inflation rate as it as the moment (0.3%) means that households can benefit
from goods and It doesn’t mean that prices are increasing faster than income,
which was the case in 2008.
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