Business Environment of the UK - Coursework Example

In the beginning of the report, I would like to talk about the basic economic problem of scar All societies are faced with the problem of scarcity, however, they differ in the way they tackle the problem. They way they tackle this problem is by the using the economic system designed to meet all the needs of economy and to make sure resources are distributed and used efficiently. There are three different types of economic systems. At one extreme lies the completely free-market economy (Ian Hobday, 1999). In this system there is no government intervention at all. All the basic decisions such What to Produce, How to produce and from whom to produce are taken by business and consumers themselves. Price is the key mechanism in this system. Changes in prices change the production and consumption patters and this system is dominated by private individuals and firms. On the other extreme, we have command economy system (John Sloman, 2002). This system is dominated by government's rules and regulations and government decide where to allocate resources, what to produce, how to produce and ration the produced resources accordingly. If we look at the economic system that is being followed in our Country (i-e England), we can clearly see that we follow a system that is a mixture of both private ownership and government control. This system is known as mixed economy and it combines the positives of both free-market and command economy. Like us, all the major countries like USA, Canada and France use this system. This system is considered as an ideal system for the businesses to thrive and government control establishes stability in the system. Macro-Economics concerns the working of an economy as whole. It provides various aims to the economy to work towards. Generally, these macro-economic aims include: Low inflation, Low unemployment, price stability and keeping balancing of payment. However, more often than not, economy moves away from these aims. To bridge this gap the government takes certain measures and actions. These actions are also known as instruments of macro-economics aims. England uses the following instruments to fulfill the macroeconomic aims. (McConnell and Brue, 2000) Monetary policy is deliberate manipulation of interest rates and money supply in the economy to fulfill the desired macroeconomic targets. Whenever there is inflation, it means that demand for good is higher than supply. In this case government usually raises the interest rate and reduces the money supply in the economy. This is known as deflationary monetary policy. When government uses this policy, less money is pumped into the economy and people now have less money in their hands to spend. Similarly, higher interest rates discourage them from borrowing from banks and this curtails their spending. When demand goes down, prices come down and inflation is taken care of. This policy also affects the business in adverse way. When government follows this policy, the businesses experience fall in their sales and some businesses might close down due to plummeting demand that this policy may lead to. On the other hand, when England is going through a period of recession, government helps by starting an inflation fiscal policy to increase the aggregate demand in the economy. They lower interest rates and increase money supply in the economy. As a result of this policy people have more money to spend and businesses flourish as a result of high demand which is brought about by more supply of money in the hands of people and their ability to borrow money increases due to lower interest rates. This is how England's government uses the monetary policy to stimulate the aggregate demand. (Lipsey, 2003) Another instrument used by the government of England is fiscal policy. This includes varying tax rates and changing government expenditures in the economy to achieve desired targets. The Government of England usually increases taxes rates and lowers expenditure when faced with inflation. It again reduces the money that people have. As a result, they have to go without some goods. Business suffers when taxes are high and government expenditure is low because people in these periods have less to spend and they experience a fall in demand for their products and vice versa. (Collin Bamford, 2002) UK might also be massively affected by global factors. There's a famous quote, which goes like this "When USA, sneezes entire world catches the flu". This statement tells us how one country is related to another in term of economics. UK will also suffer if entire world goes through a recession because it reduces the demand for the UK made goods in the international market. As a result, UK's exports will decrease creating a gap between its imports and exports and this will ultimately lead to balance of payment deficit. Later, in order to fill this gap, it will have to borrow from international organization like IMF and World Bank; this will mean it will have to supply pounds in the currency market to obtain currency of other countries from which it has imported goods. If this supply is too high, the UK's currency will lose its value and many adverse effects are going to arise as a result. One adverse effect can be imported inflation. That is because the UK's currency has devalued it will have to pay more to obtain the same good even if its value in the local market has not changed. For example, Every UK pound buys 2 American Dollars. For some reason, UK pound devalues and now every pound buys 1 American dollar. Suppose UK imports fertilizers from the USA worth $12. If we take previous high value of pound we can see that UK can buy this good by paying '6 pounds. Now when the UK's currency devalues it has to pay '6 additional despite the fact that there is no change in price of the product in terms of US dollars. This leads to imported inflation which can reduce international competitiveness of England in the international market. Similarly, fewer exports mean that workers in the exporting firms will lose their jobs and government will have to pay them unemployment benefits which will be an expense for the government. This is how factors in the international market can injure England's economy adversely. Similarly, England could gain if the international markets go through a favorable period. From the above discussion, it is very clear that no country can ignore the importance of international trade as it leads to foreign exchange earning, employment in the sector which is made up of exporting firms and to keep balance of payment at favorable firm. Without giving importance to these factors, any economy is like to crumble, even if its local market conditions are good. (Richard L. Daft, 1996) Looking at global integration economically, it can be both good and bad for England. If England joins EMU it will be able to hire cheap labor from under developed European economies and as a result its cost of production will go down, and this will make England's firms more internationally competitive. As a result, England's export will become internationally competitive and this could lead to low inflation and balance of payment surplus. If England joins EMU, it will use euro as its currency and fluctuation between exchange rates will not affect her adversely (we have already discussed above how fluctuations in exchange rate can be damaging for the economy). Economic integration would also help technology and capital to flow into England without any barriers. This is particularly important because investment and entrepreneurship is really important. This would create businesses in England and provide employment. England would also be able to indulge the Research and Development which will lead to further efficient use of finite resources. It will also allow England to benefit from the advantages of international specialization and enjoy cheap labor from all over the world. Here an example of American companies can taken, how these companies outsourced their call-centers to India where they enjoyed cheap labor and were able to cut their costs by a good proportion (Peter Stimpson, 2003) . Similarly, England could benefit and this cost-reduction will only increase the international competitiveness of products which bear the "made in England" tag. These products would become more attractive in the international market and attract more buyers and there is a chance that England's balance of payment would increase as result. In the end, I will conclude my report by giving stress on the fact that no business can thrive if it does not heed to international market conditions. Globalization has indeed make this world a small place and if we do not learn from others, share technology, enjoy benefits of international specialization, indulge in mutual research and development, soon we will run out of precious finite resources like oil. Therefore, it is times that all of us work together through economic integration and make this world a harmonious place. References: Ian Hobday. Economics: A first course. Sunrise Publications (1999) Richard L. Daft. Management 4th Edition. The Dryden Publications (1996) Collin Bamford. AS and A Level Economics. Cambridge University Press (2002) Lipsey and Chrystal. Economics Tenth Edition. Oxford University Press (2003) John Sloman. Economics. Prentice Hall (2002) Campbell McConnell and Stanley Brue. Economics. McGraw Hill (2000) Robert Pindyck and Daniel Rubinfield. MicroEconomics. Prentice Hall (2000) Peter Stimpson and Paul Borrington. GCSE Business Studies. Cambridge University Press (2002) Read More