Business Environment - Essay Example

? Business Environment Contents Business Environment Question 3 Introduction 3 Conclusion 10 Question 2 11 Introduction 11 Conclusion 14 Reference 16 Question 1 Introduction The economic indicators contribute in analyzing the performance of an economy and in forecasting the future performance. The major macroeconomic indicators include GDP, inflation and rate of unemployment. The assignment will discuss about the measurements of the key macroeconomic indicators as well as the importance of each indicator. GDP: The value of all goods as well as services produced within the geographical limitations of the country within a particular time period is regarded as Gross Domestic Product. The living standard of a country is often measured by the per capita GDP. The expenditure method: Where, C= Consumption, I=investment, G=government expenditure, X=exports, M=imports. The reciprocal circulation of income between the producers as well as the consumers is referred as the circular flow of income. From the circular flow of income the following equation is derived: Leakages=Injections i.e. S+T+M=I+G+X where, S= net savings, T=net taxes, M= import expenditure, I=Investment, G=government expenditure, X=export expenditure. It following equation can also be derived from the above: (S-I) + (T-G) = (X-M). If the value of the left hand side of the equation is negative, then it must have been financed from somewhere. The right hand side of the equation denotes the current account balance. Therefore, (S-I) + (T-G) = (X-M) + foreign savings There are three stages in the production process. In the first step of domestic production the gross value of the domestically produced goods as well as services is estimated. The second stage in the production process comprises of determination of the value of intermediate consumption while in the third step of the production process the value of the intermediate consumption is deducted from the gross value with the aim to arrive at the net value. The total of the gross added value in various activities related to the economy is referred to as GDP at factor cost. The sum of the indirect taxes and GDP at factor cost subtracted from subsidies will give GDP at producers’ price. According to the income approach, GDP is calculated by summing up the incomes that firms are required to pay to the households for providing the production factors namely wages, interest, rents as well as profits. Inflation: Inflation is defined as the continuous or sustained rise in the general level of price. It can also be defined as continuous reduction in the value of money. The movement in the general price level is referred to as inflation. The changes in the price level of goods and services purchased by the households are measured by Consumer Price Index (CPI) and the Producers’ Price Index (PPI). The CPI can be calculated as the ratio of updated cost and price of the base period multiplied by 100. The second measure that is producer price index measures the average changes in prices as received by the producers for the products. Unemployment: Unemployment or joblessness occurs when individuals are actively looking for jobs but are not able to find it. The rate of unemployment is calculated by dividing the number of unemployed in the total labor force usually in percentage form. The International Labor Organization provides four methods on measuring the unemployment rate. The most preferred method of unemployment rate calculation is Labor Force Sample Surveys. Surveys provide the most comprehensive results and contribute in calculation of unemployment according to groups. The official estimates are calculated from the combination of information from the other methods. Social Insurance statistics is computed by the number of persons insured for the benefits and the number of insured persons collecting benefits. The balance of payments: Healthy balance of payments situation is ideal to attract investments. The investments can be used in diverse activities in up gradation of technology. The technological advancements will be the added advantage of the company among other competitors. Interests can be shifted in researches to use the fuel efficiently or innovations of fuel efficient flights. Fluctuations or variations in the balance of payments situation will reduce the aggregate demand for tickets. This may hurt the confidence of the investors. The balance of payments records all financial transactions that are made between business and services, consumers and the government in one country with another. The balance of payments acts as the interpreter on the amount spend by the consumers as well as the firms on the imported goods and how successful the firms are in exporting to other countries. The balance of trade and net investment income comprise the current account. The net investment income flows in from payments of interest, dividends and profits from the external assets. It is important for every economy to manage the indicators because they reflect the state of the economy. The indicators are used to formulate the future prospects of the economy. An overall assessment can be made by identifying the values of the macroeconomic indicators. If an investor is willing to invest in an economy the macroeconomic indicators will present the state of the economy towards him. The values of the macroeconomic indicators over a period f time reflect the progress of a state and interpret the areas where the economy needs more improvement. A stable climate of macroeconomic environment is necessary to create a sustaining condition for business opportunities. The UK economy has performed poorly according to historical data. The volatility of economic growth and employment hindered the long term growth prospects of the economy. Given the poor performance of the economy the government introduced reforms in macroeconomic management which were designed to provide stable footing to the policies. The bank of England was entrusted with the responsibility of setting the interest rates according to the economic conditions. The changes were complemented by the fiscal policy based on stringent rules and principles directed at maintaining healthy public finances. Therefore the new macroeconomic framework contributed in delivering economic stability and ignores the unwanted fluctuations of output. The recent developments of the economy are clearly good news but it is important to maintain the performance in the years to come. The changes are yielding tangible returns but it is to be ensured that the economy does not get back to the weak and unstable situation that acts to held back productivity and competitiveness. The productivity growth is induced by the innovations of new technologies. Competition within an economy and across economies plays a major part in diffusion of new knowledge and advancement towards growth. But it is difficult to measure the contribution of competition and it is likely to emerge as the determinant factor in driving high productivity levels. Since competition is a dynamic process a single measure is not sufficient to provide a good reflection of the competitive environment. The relative degree of openness of the economy influences the extent of competition. In terms of trade as proportion of output, UK was in the same slot as of France and Italy in 1999 but behind Germany. The economy of UK is relatively open. Therefore UK can take the advantage of increasing global trade and accrue the benefits of internal development and production techniques. But the capability of the working population to adapt to the changing environment is essential in determining the development scope of the economy. It is utmost importance that the economy of UK follows the path of taking positive juncture with the European Union and the rest of the world with the objective of removing the trade barriers with due focus on the service sector where the markets are still not liberalized. Efficient labor markets and flexible workers are the requisites for successful functioning of the economy. The smoothness of the labor market can be analyzed by the changing patterns of employment, the relations within industries and the effects of the regulations in the labor market. The unemployment rate serves as a good measure to determine the performance of the labor market. Long and sustained unemployment involves personal cost and can affect the efficiency by limiting the participation of the individuals in the market for labor. As compared to other G7 countries, the unemployment performance of the country is relatively good in European terms. The unemployment rates have been the lowest since 1970s. The government is involved in providing comprehensive training programs that builds the stones for dynamic economy. The welfare to work strategy is aimed to put an end to the long term unemployment. The government engages itself in investing long term employment of participants which will provide them an opportunity to take control of their livelihood. The workings of the labor market are emphasized by the White Paper of the government on business and skills. It focuses on the importance of training and skills for the workers participating in the labor market. The government had announcements on the reformation of vocational training and education. Such actions are aimed to improve the relation between the training providers and employers. The retraining programs and strategies on enhancement of sectoral skills are designed to help the workers in sectors who are on the verge of getting affected by the structural change in transition to a knowledge based economy. The economy of UK provides wide ranging opportunities to those willing to land up with a job. In the period of 1997 to 200, the most comm. Form of working are based on specific time frames and self employed or temporary form of working are were on the declining curve. In the long course of time, the proportion of people employed in pert time and temporary activities has increased. As compared with the European Union, the proportion of people working part time is high in UK. The incidence of self employment is n the average while the percentage of people working as temporary workers is below the average of the European Union. The following chart will provide a clearer picture. The economy of UK performed well in terms of GDP and succeeded to avoid the widely predicted crisis in Asia and Russia. The pattern of economic growth has not been even and the disparities in levels of investment, educational qualifications call for immediate action. The Review report of the government for 2000 asked for more funds to be allotted to Regional development Agencies. The following chart will provide the idea on the performance of the economy in GDP per head of population as well as the growth of real GDP per head. The performance of the competitors indicates that the performance of UK in terms of GDP per capita could have been better. Since productivity plays an important role in improving the GDP per head, the economy can lend much time in order to improve the component of development. Every year since 1987, the UK economy is facing deficit in the current account. In 2006, the level of deficit reached at the maximum height of 44.9 billion pounds. The level of deficits is witnessing a cyclical pattern as presented in the chart below. A deficit in the current account can be a problem if it is persistent as it forms large share of GDP. The Central Bank has low reserves and economy falls under the vicious circle of poor record. Trade deficits and economic growth are closely related. After the recession of 1990 the trade deficits started to fall at rapid rate. If the economy grows above the anticipated rate then the domestic output lacks the capability to match the domestic demand. Conclusion The above discussion provides a reflective summary of the different macroeconomic indicators and the affects they can have on the economy. In the discussion the economy of UK was considered and the discussion encircled the discussion while showing the tradeoffs associated and the issues relating to the various macroeconomic factors. Question 2 Introduction A market structure is defined as the number of firms existing in the market and involved in manufacturing of identical products. The possible market structures within an economy are monopolistic competition, perfect competition, monopoly, oligopoly, and duopoly. The market structures can be broadly categorized into perfect competition and imperfect competition. In the market of perfect competition there are many sellers in the market producing homogeneous products. The buyers are well informed about the price level of the market and have the option to buy the product from any seller. A market structure that does not satisfy the conditions of perfect competition is termed as imperfect competition. The market structure of the electricity supply industry can be characterized as oligopoly. There are small players in the market and the existing competition in the market characterizes that of oligopolistic market. The market is dominated by small number of firms that controls a major proportion of the share of the market. The Electricity industry is UK can be characterized by three key stakeholders. They are the generators, distributors and the suppliers. The generators are entrusted with the responsibility of generating the energy for domestic use. The generated energy flows through the regional distributed networks. The distributors can be recognized as the owners of the networks and towers that direct electricity into the homes and businesses. The distributors act as the organizations that sell electricity to the direct consumers. The suppliers are recognized as the companies that supply as well as sell electricity to the consumers. The suppliers act as the first point of contact when arranging the supply of electricity to the different consumers’ types. Since privatization in the electricity and gas sector in UK, the most important development that has taken place is introduction of competition. With the privatization of the non-nuclear generating assets competition was inducted into the electricity industry of England and Wales. During the periods of privatization, 7 companies participated in the generation market for England and Wales. By the end of the year 2007, 30 companies got themselves involved in generation of electricity in UK. The electricity supply industry has opened up significantly towards competition. The year 1990 marked the introduction of competition in the industry. In 1998, competition was introduced in electric supply to domestic consumers. In 1999, the consumers had the option to choose their favorite electric supplier. In the last month of December, the government announced the Electricity Market Reform on the White Paper. The Electricity market reform will pave the way for achieving three objectives across the energy sector. The reform is expected to ensure steady supply through the provision of diverse range of renewable, nuclear and unabated gas. Therefore it will be possible to take care of the demand side. The Electricity market reform is expected to ensure sufficient flow of investment in sustainable low carbon technologies. Such investments will pave the path for UK to reduce the emissions of carbon by 80% by 2050. The policies of the Electricity market reform are aimed to maximize the benefit for the consumers as well as minimize the costs. Overall Electricity Market Reform can be anticipated to bring large scale investments in low carbon generation capacity in UK. It will also deliver services in cost effective fashion. In oligopolistic market the decision of one firm can influence the decision of other firms. The responses of the market participants are taken into account in the planning process by the oligopolists. In the market for oligopolists the participating firms often collude to set the price at the level which will provide maximum profits. The aim of each participating firms is to maximize revenue. When there is the option to collude the firms tend to look for such opportunities as collusion is anticipated to bring maximum revenue. When a formal agreement exists for some collusion to take place, then it is known as cartel. If one firm believes that the other firm will keep the level of output at the fixed level, then that firm may opt to raise the production of its output s o as to acquire more revenue. In a situation of cartel, the firms can recognize the impact of joint profits from the production of each unit of output in either firm. In this situation the firms can also take the initiative to simultaneously raise the output with the objective of raising profits. But if one firm believes that the other firm may raise the volume of production, then the other firm will try to increase the level of production first and accrue the profits as much as possible within the time the other firm raises the output. The electricity supply industry in UK is characterized by many firms. But to examine the possibility of collusion in the market it is necessary to judge the existing market structure. From the above discussion it can be inferred that the industry sector is competitive. If the companies involve themselves into collusion then some problems can creep in into the industry (Simmonds, 2002, pp. 111-114). The electricity generation processes is dependent on the availability of natural resources. If one operating firm believes that the other operating firm will increase the level of output then that firm will increase the production. Now the demand for electricity is met by the operating firms. Excess production will only lead to loss of electricity. Therefore natural resources are getting wasted. Again if the operating firms collude they will take the initiative to raise the price of electricity supply which will directly affect the consumers. The electricity supply sector is also regulated sometimes from the government. Interventions of the government aim to reduce the pressure on environmental hazards. In a public cartel the government plays the role of enforcing the agreement and the sovereignty shields the cartel from the legal actions. The private cartels are subjected to legal liabilities. In the electricity supply industry the government can enforce a cartel. But if the cartel is enforced the government will have to set the regulations otherwise the private companies will try to look to maximize the gains and hurt the interest of the consumers. The industry is guided by the competition laws and therefore any stringent measures form the companies that seem to break the rules of the law will not be beneficial from the point of view of the society. The industry is highly capital intensive. The success of the industry is dependent on the management of the investment programs. If a cartel exists in the industry, newer investments will not flow in into the industry as the investors will start to believe that it would not be possible to break the cartel and therefore the investment ventures will not be able to generate profits for the investors. If the regulation is effective and credible along with stable conditions of the economy the private enterprises will get attractive towards the sector. The entry of new companies means increase in the intensity of competition which is good from the point of view of the consumers. The competition will align the prices with the cost and eliminate the cross subsidies. Conclusion The introductory part considers the different market structures that are possible within an economy. The broad categories identified were perfect and imperfect competition. The market for electricity supply industry was identified as imperfect competitive industry. In other words the market structure identified was that of oligopoly. The market structure of the industry is dominated by few suppliers. The major proportion of the market is dominated by the players. The three stakeholders are entrusted with three different responsibilities. The generators task involves generation of the product for domestic use while the distributors are recognized as the persons responsible in distributing the generated product to the different consumers. The suppliers are the stakeholders who supply the electricity directly to the houses or the plants that require electricity. From the above discussion it can be concluded that if the intensions behind Electricity Market Reform can be achieved a steady supply of electricity can be anticipated. The demand will not be affected and therefore the benefits will get accrued to the consumers. A sufficient flow of investments will contribute in reducing the carbon emissions in the years to come. In the phase of global warming and increasing level of pollution the investments are necessary in this area so that the emissions can be reduced to the lowest possible level. Conclusively analyzing the risks associated with the electricity supply industry it will be better from the consumers’ point of view that the operating players do not collude as such action will not be beneficial for them. Reference Simmonds, G. 2002. “REGULATION OF THE UK ELECTRICITY INDUSTRY”. [pdf]. Available at: http://www.bath.ac.uk/management/cri/pubpdf/Industry_Briefs/Electricity_Gillian_Simmonds.pdf. [Accessed: 5th December, 2012]. Read More