Unit 1 – The Business Environment P5
P5 – Describe the influence of two contrasting economic environments on business
activities within a selected organisation.
Different economic environments affect business activities as the businesses will be catering
for different customers with different needs. The two economic environments that will be
discussed are the UK and China economies as they contrast. Inflation and unemployment
will be discussed for the UK and economic growth and income will be discussed for China.
The UK economy has a GDP of “$2.44 trillion at a growth rate of 0.3%” (bbc/10613201,
2013) which makes it the sixth largest in the world. The current unemployment rate is at
“2.47 million” (bbc/ 10604117, 2013) with an inflation (RPI) rate of “2.6%” (bbc/10612209,
2013). The UK also has the “sixth highest average salary in the world, which is at £33,513”
(bbc, 2011). The UK has a “largely dominant service sector, which accounts for 78% of its
GDP” (wiki, 2013).
China’s economy has a GDP of “$8.227 trillion at a growth rate of 3.3%” (Wiki, 2013),
making it the second largest in the world, which is considerably more than that of the UK. It
has an “unemployment rate of 4.01% and an inflation of 2.5%” (wiki, 2013). China’s yearly
average salary is “$6,091 ranked at 90th in the world” (wiki, 2013). The secondary sector is
largely dominant within China.
As residents within the UK earn quite a reasonable amount, it allows Kellogg’s to sell their
products efficiently and means the UK provides a large percentage of market share to
Kellogg’s. China on the other hand has a considerably lower average wage, so Kellogg’s may
currently struggle to sell their premium products there. Regardless of this, as the Chinese
economy is growing exponentially, it means people’s wages are increasing which provides a
good future prospect for them to sell their products there.
Inflation is caused when a currency loses its value so the purchasing power of a unit of
money decreases, so the same goods and services require more currency than they did
before an increase in inflation. When Kellogg's purchases raw materials, inflation means
they have to spend more money, so the finished product will end up costing more to the
consumer as Kellogg's will increase the price to maintain profit margins. As the consumer
has to spend more to purchase Kellogg's products, their buying influence may change to an
economic and value for money point of view as opposed to a quality priority. There is also a
lower consumer demand for products which influences Kellogg's to advertise more during
an inflation environment to re-illiterate how important it is for a consumer to eat quality
foods, to try and maintain demand.
During the recession in 2008 and 2009, the inflation reached “5%” (BBC, 2010) which is
drastically larger than today’s inflation rate of 2.6% (bbc/10612209, 2013). It was apparent
to Kellogg’s that the inflation would cause products to become more expensive. This means
Kellogg’s were influenced to try and maintain demand for their products so during that
time, Kellogg's strategically advertised extensively and increased advertising expenses by
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