Seminar: Applying economic concepts to your business

Topic Number:5

Principles of Business

Overview

The economic environment is an important determinant of business success. This seminar looks to determine the implications and impacts of the global economy on your business.

You are tasked with initially explaining the concept of supply & demand and the factors that influence it in relation to your business activity.

As part of this analysis you will determine a number of the key economic indicators in relation to your business. As you have recently learnt about the various strategies you can adopt when ‘going global’, determine how the theory of comparative advantage can help your business.

Finally, if you were going to make an investment abroad explain if you would opt for direct or indirect FDI.

Learning outcomes of this seminar

• Be able to explain the concept of supply & demand and the factors that influence it in relation to your business activity

• Identify and describe the key economic indicators that could impact your business?

• Illustrate and apply the comparative advantage theory in your business

• Critically evaluate and describe the various global investment options

Agenda for this seminar

What is the impact on key economic indicators such as GDP, inflation and employment?

Explain how you would use the concepts of comparative advantage to your businesses benefit.

If you were going to make an investment abroad explain if you would opt for direct or indirect FDI. Explain your rationale.

Explaining the concept of supply & demand and the impact of a slowing Asian economy on the UK’s economy? How could this impact your business?

Structure for the session

You will have 15 minutes to

discuss each question

We will have a de-brief at the end of each 15 minutes to hear your thoughts on each area

Feel free to ask questions but please do not have separate conversations ‘we are all in

this together’!

Explaining the concept of supply &

demand and the impact of a slowing Asian economy on the UK’s economy?

How could this impact your business?

Lets look at the UK & Developing Asia

According to the IMF (2012:60), developing Asia (DA) is moderating primarily due to the slowing of exports to the EU region, reliance on Euro banks, crisis and deteriorating business sentiment. However, domestic demand still fuels growth in key economies across the region (e.g. China) (IMF, 2012:60).

Source: IMF, 2012

Implications for supply and demand

The UK has a growing reliance on imports and exports and hence increasing ‘trade-openess’ (ONS, 2011). The UK’s propensity to import goods outweighs its exports however this is partially offset by its service exports (ONS, 2012a & Begg and Ward, 2009:365). Developing Asia (DA) is an important supplier of UK imports and recipient of goods and services from the UK (e.g. call centres in India) and therefore does have impact on the macro-economic environment in the UK (DBIS, 2010).

Source: IMF, 2012:127

In accordance with the theory of comparative advantage (Ricardo, 1817) the UK is exposed to fluctuations in other national economies/regions such as DA. The largest direct impact on the UK would occur due to imports (leakages) and exports (injections), however one must also account for foreign direct investment flows. The UK will benefit from exporting goods/services it can produce at a lower marginal cost while importing goods/services that it cannot produce as efficiently.

Implications for supply and demand

Consider each of the

curves

What is the impact on key economic

indicators such as GDP, inflation and

employment?

Impact on GDPIn line with the circular flow of income (Begg and Ward, 2009:208) we can see that reduced growth in DA will negatively impact the net value of goods and services produced by UK firms as the demand reduces. This will in turn reduce aggregate income. The effect is a decline in the UK’s GDP in the short-term however in the long-term a number of scenarios are possible which is likely to increase AD2 to AD*.This assumes, in line with the theory of comparative advantage, the UK in the short-term would not be in a position to produce the goods themselves and therefore needs to buy the goods or services more expensively from DA or elsewhere. Also consider the impact of monetary and fiscal policy intervention.

Source: Begg and Ward, 2009

Impact on inflation & unemployment

As the UK imports more/cheaper goods from DA it will make the cost of goods and services cheaper in the UK. This will in turn reduce inflation.

The net effect will be an increase in unemployment in the UK as the value of labour will fall and firms seek to pay lower wages. Considering the IMF (2012) have only predicted a short-term slowdown in DA the type of unemployment is likely to be cyclical in nature (Begg and Ward, 2009:242). Government intervention could be used to reduce unemployment in the short-term.Reflects workers who have lost jobs due to the adversities of the business cycle also referred to as demand-deficient unemployment.

Source: Begg and Ward, 2009

Explain how you would use the concepts of comparative

advantage to your businesses benefit

Comparative Advantage: A Re-cap

View video: https://www.youtube.com/watch?v=FpTBjRf8lGs

Consider your core production lines: Where should you produce them?

100

(1C=1R)

100

(1R=1C)

50

(1C=4R)

200

(1R=1/4C)

Cars Rice

A

B

Consider the per unit opportunity cost and go for the lowest option

Consider why one location has lower opportunity cost

Source: Wikipedia.org

How will this benefit your business?

Higher Margins

Lower Costs

More Profit

Are there any other implications?

An example from Starbucks

View video: https://www.youtube.com/watch?v=ElYNhGbOTOQ

If you were going to make an

investment abroad explain if you would opt for

direct or indirect FDI. Explain your

rationale.

Firstly consider the options

View video: https://www.youtube.com/watch?v=I8w7Kv2aZPg

Firstly consider the options

Direct Indirect

• Invests directly in business operations in another country

• M&A or establish a new business

• More control• Greater stake• Form global synergies• More sticky

• Investing in a company operating in another country through a financial instrument

• Invest in shares or bonds

• Less control• Less stake• No global synergies• Less sticky

Secondly, consider what your business needs and what its current resource position is

Do you currently have the

ability/capability or do you need to

acquire it?

Does it make strategic sense for

your business?

Do you have the required

resources?

Consider how you would structure a

deal

Thirdly, identify good opportunities to invest in considering fit with your organisation

Determine if you will be able to realise the

anticipated synergies

Scan the market for a strategic fit

End of Seminar

Note: This recording is for your personal use only and not for further distribution or wider review.

© Pearson College 2013