External Environment

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External environment

External Factors (environment) - It is the external forces that are beyond the control of the individual business A number of external factors can affect business (STEEPLE analysis) - economy - These are factors outside the business - political/government policy that may affect its - social decisions. - External factors that - technological may present opportunities - ecological or threats to - legal a business - ethics

Economy – business need to observe the economic indicators constantly because eco. indicators is the external factors that determines the demand for their product and therefore their profitability. Eco indicators : - eco growth - Inflation - unemployment - balance of payment

What effect do they each have on business and why does business need to watch them carefully?

• • • • • •

Eco growth – rate of growth of output and income The level of employment or unemployment The rate of inflation The exchange rate The balance of payment The impact of government policy on business organisation: - policies relating to interest rate - taxation - government expenditure - the exchange rate.

Economic growth is defined as an increase in the productive capacity of the economy or a rise in real national income per head. As it provides the means achieving higher living standards

Economic growth is obviously beneficial to private sector firms - new market opportunities will be created - birth of new firms - the expansion of existing ones

Growth can be measured by changes in national income. National income is the total amount of income, output/ spending in the economy. It can be measured in a number of ways :- GDP - GNP

The importance of GDP • shows how much has been earned within a country over a year • Shows how much money is flowing around the economy • A rise from 1 year to the next is usually an indication of growth By studying changes in national income, it is possible to understand what is happening in the economy.

If economy growth is taking place : • favorable trading conditions for business, many new business set up and continue to grow. • Business may find a healthy demand for their product.

Negative growth maybe an indication of recession in an economy. This will have the opposite effect to the business.

The business cycle Economies tend to grow over a period of time Growth in the economy is unlikely to be continuous over a long period.

Output does not grow smoothly. - It tends to fluctuate, going through ‘up and down’. This short term fluctuations are know as business cycle.

output
Boom/peak recession

Trade cycle recovery
slump

A traditional business cycle There are 4 parts to the business cycle • Boom phase • Recession • Slump • Recovery

year

1) Boom/ high growth/ peak - employment is high - unemployment is low - consumer spending & investment will be high - high levels of demand from people with increasing incomes - profits should be high for most firms - wages might be rising - output will be high - the economy will be growing steadily - business and consumer confidence is also likely to be high

2) Recession/down turn/ economy slowdown
• • • • • Income and output start to fall Fall in demand A decline in profit Some start to lay off workers Rise in unemployment

3) Slump/ depression
• Unemployment is likely to be high • Confidence, spending, investment and profits are low • Many firms may be forced out of business • Sometimes when growth is taking place but only very slow.

4) Recovery/ expansion/ upswing • • • • Income starts to rise again Output will begin to increase as well as spending Confidence increase Business will start to employ more workers as a result.

Different stages of the cycle have many different types of effect on business.

Factors that can lead to economic growth
Land – includes all natural resources such as forests, oil, coal deposits – some countries have experience economic growth...
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