Impact of Monetary and Fiscal Policies of Business Organizations - Example

Report for Trainee Bank Clerk at Bank of England of the Contents Contents 2 Introduction 4 2. Discussion 4 2 Economic Systems and Effective Attempts of Resource Allocation 4 2.2. Impact of Monetary and Fiscal Policies of Business Organizations 8 2.2.1. Monetary Policy 8 2.2.2. Fiscal Policy 9 2.3. Impact of Competition Policies and Other Regulatory Mechanisms on Business Organization 10 2.3.1. Competition Policies in UK 10 2.3.2. Advantages and Disadvantages of UK Competition Policy 10 2.4. Price and Output Decision of Apple 11 2.4.1. Oligopoly Market Structure 12 2.4.2. Monopoly Market Structure 13 2.4.3. Perfect Competition 14 2.4.4. PESTLE Analysis 15 2.5. Key Global Factors and EU policies that influence UK Businesses 17 3. Conclusion 18 References 20 1. Introduction Economic system is the method of production, exchange of goods and services as well as allocation of critical resources in the economy. An economic system integrates different institutions, public as well as private sectors, multiple agencies and consumers. Every economic system is constructed in such a way that attempts to provide solutions for three elementary and interdependent questions: the nature and quantity of the production of goods and services, distribution of the produced goods and most importantly, level of allocation of resources (Andrews and Criscuolo, 2013). In this paper, the availability and allocation of critical resources in different economic system will be discussed. Emphasis will also be given on Apple Inc. and how the company operates successfully in the UK economic framework. Finally, the key global factors will be identified in order to evaluate how such factors influences the UK business. 2. Discussion 2.1. Economic Systems and Effective Attempts of Resource Allocation Though, there exists multiple numbers of economic systems, the most important systems can be categorized as free market economy system, centrally planned economy system and mixed economy system. 2.1.1. Free market Economy System Figure 1: Free market Economy System (Boyne, 2002) Free market economy system can be defined as a market economy in which the production process is carried out based on the prevailing demand-supply condition in the market with negligible government intervention. In the free market economy system, transaction between buyers and sellers are allowed on the basis of mutual agreement on price without any third party intervention by the means of tax and tariffs. As involvement of government is minimal in this economy system, the responsibility of allocation of resources is largely delegated in the hands of private enterprises. This is an important characteristic of free enterprise where private entities are allowed for acquisition and management of the resources of the economy as well as utilization those resources. Neither the government nor the producers are in a position to influence the circulation of resources and seek abnormal profit through purchasing of inputs or selling of outputs. The economies of Hong Kong, Singapore, Australia and Switzerland are some of the examples of free market economy system where allocation of resources is entrusted to private enterprises (Boyne, 2002). 2.1.2. Centrally Planned Economy Figure 2: Centrally Planned Economy System (Hall and Lieberman, 2009) In a centrally planned economy, the decisions regarding economic resource allocation are concentrated in the hands of government. In this type of economic system, private entities are kept far away from the economic activities and accumulations of economic resources. The economies of Asia, Europe and Latin America incorporates centrally planned economic system where resources are allocated by the government on the basis of the requirements of industrial input and need of population (Hall and Lieberman, 2009). 2.1.3. Mixed Economy Figure 3: Mixed Economy System (Hall and Lieberman, 2009) Mixed economy system involves the characteristics of both of the free market and centrally planned economy. As an after- effect of globalization, most of the countries in this world have adopted this kind of economic system. The existing resources in such economy are made available to both the private and public sectors. In fact, the government encourages the private sectors to ensure optimum utilization of existing resources in order to maximize the economic profit of the nation itself. The economies of United Kingdom, Russia, China are the most prominent examples of such economic system where resource requirement of critical sectors such as defense and fire services are the responsibilities of government sectors whereas resource allocation of healthcare and banking systems are managed by both the public and private sectors. When the economy is mixed, wide array of combination between mixed and balanced resource allocation can be observed. For instance, the government of Cuba tends to allocate majority of the resources. Conversely, resources allocation in Europe is done by a combination of private and public sector. In fact, when one of the parties fail to satisfy the optimum allocation of resources, the other party comes forward and takes the responsibility so that the economic equilibrium doesn’t get disrupted (Hall and Lieberman, 2009). 2.2. Impact of Monetary and Fiscal Policies of Business Organizations Monetary policy and fiscal policy deeply impacts the business cycle of an economy as well as the organizations operating in the particular economic systems. Business cycle is the constant procedure of expansion and contraction of the economy. 2.2.1. Monetary Policy Monetary policy is the procedure through which the government tries to stabilize the economy by controlling money supply and rate of inflation. There is a positive correlation between level of money supply in the economy and inflation rate. As money supply increases, it leads to create an incremental inflationary pressure in the economy. However, if the money supply is restricted for controlling the inflation, the growth rate of the economy will be decelerated. Hence, the monetary policy tends to manage the interest rate in such a way that will facilitate the economic growth and safeguard the economy from hike in price level as a result of inflationary pressure. If the monetary policy tightened the interest rate, cost of borrowing decreases. As a result, a business organization gets an easy access to investible capital for future expansion. A lower interest rate will de-motivate the citizen of the economy for further investments. Hence, consumer spending will increase as a result of increasing level of money supply in the economy. As a consequence of inflationary pressure, the price level increases. Hence, the business organization experiences a reduction in aggregate demand. Similarly, loosening the interest rate will lead to restrict the money supply in the economy which in turn will lead to enhance the demand for a business organization (Lopez, 2006). 2.2.2. Fiscal Policy Fiscal policy helps the government to adjust its expenditure i.e. spending level of the economy and revenue collection in terms of taxation programs. Fiscal policy impacts the business organizations in two fundamental ways. In order to enhance the government revenue, the government may increase the rate of personal as well as corporate tax which in turn restricts the business expansion of a particular organization. Public sector organizations such as rail, power supplies are positively impacted when the government plans to increase their level of spending as in most of the times; such spending is directed towards infrastructural development of the country. Organizations are also indirectly benefitted as infrastructural development facilitates the organizations to expand. In order to facilitate import and export activities, fiscal policy sometimes tends to loosen the level of tariffs and trade barriers so that the economy can enhance international trade. Such activities help the economy to invite Foreign Direct Investments (FDI) and more foreign companies tend to start and expand their business with such up-gradation of infrastructure and simplification of trade barriers (Moomaw, Olson, McLean and Applegate, 2009). 2.3. Impact of Competition Policies and Other Regulatory Mechanisms on Business Organization 2.3.1. Competition Policies in UK The UK economy is characterized by a large number of competition policies in order to restrict collusion among firms and to prevent them from gaining monopoly power for securing public interest. The Competition Act, 1998 tends to support the competition policy adapted by UK, aided by European Nations (EU). Office of Fair Trading (OFT) is the non-minstrel governing department of the UK that is responsible for investigation of collusive behavior and merger activities that may lead to raise monopoly power among firms. Competition and Markets Authority (CMA) was constructed in April, 2014 under the guidance of Regulatory Reform Act, 2013. The main agenda behind establishing such governing body was to monitor industrial competition in order to safeguard the consumer need. Various merger activities are intervened by these departments in order to verify whether merging of big corporations are forming monopoly in order to control more than 40% of market share in the concerned sector and if such possibility occurs, the committees immediately interfere and restrict the firms to be merged in order to maintain financial security of the citizens and to uphold the financial stability of the economy. Predatory pricing i.e. selling of products at a price, lower than the cost of production is also restricted by such institutions so that the sales of competitive firm does not gets affected by unethical consideration of the producer (DePamphilis, 2010). 2.3.2. Advantages and Disadvantages of UK Competition Policy The competition policies adopted by the UK government have protected the consumers of the economy in many ways. For example, in absence of competition policy, if a firm gains market power to influence and increase the price level above the competitive price, the consumers of the UK economy will have to purchase the products and services of the firm at that higher price. Competition policy restricts such behavior of the firms so that competitive pricing prevails in the economy. Such competition encourages the firms to produce a better quality product and provide quality after sales services in order to ensure acceptability of the products in the competitive market segment. Consumers are also provided with a wide array of alternative products or services so that they can choose the product according to their own preferences of price and quality (Glowik and Smyczek, 2011). However, criticism should also be cited when such regulations hampers growth potential of the firms. Formulating non-minstrel governing body also reflects the government’s inability to regulate the competition effectively and efficiently. For instance, it has been claimed that defective regulatory complexities of FSA and the of Bank of England indulged the commercial banks to enhance their risk exposure beyond their capacity that in turn had driven a large number of banks and financial service firms to go out of business (Timothy, 2003). The second and more contemporary example is the alleged capture of the tax authorities (HMRC) by the UK’s mobile phone giant, Vodafone, who apparently negotiated a £6b tax reduction, reducing their tax bill for 2009-10 from £7b to £1b (DePamphilis, 2010). 2.4. Price and Output Decision of Apple In this era of technological advancement and continuous innovation, especially in the mobile phone industry, constant effort from Apple Inc. to improve its products led them to come up with iPhone 6 and iPhone 6 Plus. Recent launch of these products have compelled its competitors such as HTC, Samsung and Blackberry to concentrate on further research for product development and introduce updated version of smart phones in the industry. Naturally, such effort made by Apple Inc. will be reflected in the price-output decision of the company. In the next segment, how different market structure tends to change price- output decision of the company will be evaluated (Hall and Lieberman, 2009). 2.4.1. Oligopoly Market Structure In oligopoly, small group of large firms control the market segment. Various kinds of collusion tend to reduce competition in the market which in turn leads to increase price level for the consumers. Considering the smartphone market, the industry consists of few numbers of competitors such as Apple, HTC, Blackberry, Samsung and Nokia. Though oligopoly market is dominated by the few existing firms, Apple Inc., being the most innovative brand, tends to take the position of price leadership. Hence, Apple set the price of its products first and according other brands tends to set their price level aligning with the market demand, market position and target segment of those brands. As Apple Inc. targets the premium customer segment, the company follows premium pricing. Following that, the companies like Samsung and Nokia tends to reduce their price level in order to capture the mass demand. In order to achieve that, Nokia, Samsung and HTC involve into various sort of non-price competition such as ad-campaigns in order to enhance their demand (Hall and Lieberman, 2009). 2.4.2. Monopoly Market Structure In a monopoly market structure, as a firm is price maker, it can charge any price for its products due to absence of any close competition. In smart-phone industry, Apple may gain monopoly power in short run by capturing a large chunk of market share (more than 25%) of the UK smart phone industry. In this scenario, Apple will tend to charge a price for iPhone 6 which is equal to its marginal cost. Figure 4: Price- Output Decision in Monopoly Market (Hall and Lieberman, 2009) In short run, the level of output will be adjusted by the company through determining the price level. Equilibrium will be achieved where marginal cost will intersect marginal revenue and at that point of equilibrium, price and quantity of output will be determined, as demand is not explicit for Apple in a monopoly situation. However, prevalence of strict competition policy in the UK economy will not let such condition to sustain for a longer period. Moreover, continuous entry and expansion of companies such as HTC, Blackberry, Nokia and Samsung into the smart phone market segment will lead Apple Inc. to forgo its monopoly situation and continue its business in a perfectly competitive situation (Hall and Lieberman, 2009). 2.4.3. Perfect Competition In short run perfectly competitive market, all existing firms are price taker. Each and every firm operates in a profit maximizing motive. Hence, in this market structure, if Apple tries to charge a price higher than its competitors such as HTC or Samsung, they have to lose the potential sale as smartphones with similar features are available to the buyers at a small price. Figure 5: Price- Output Decision in Perfect Competition (Hall and Lieberman, 2009) In a perfectly competitive market, marginal cost varies along with the level of output. Hence, all the manufacturers available in the market tend to increase the level of input to that particular level where marginal cost intersects price level. At that point, profit is maximized and at the point of equilibrium, price level and output will be determined (Hall and Lieberman, 2009). 2.4.4. PESTLE Analysis PESTLE Analysis is a strategic tool to analyze the macro environmental attributes of the environment such as political, economic, social, technological, legal as well as environmental considerations. Conducting PESTLE Analysis for Apple Inc. in the UK context, the following factors are explored (Cullen, 2011). Political Factors The democratic political environment of the United Kingdom and stable governance systems assisted continuous development and innovation of Apple Inc. Strong trade relations of the UK with other European and Asian countries have also facilitated the growth path of the company. However, geo-political tensions, terrorism and civil wars etc. are some of the uncontrollable political issues that largely hampers sale of Apple’s product. Apple has outsourced some of its manufacturing units to China, Korea and other countries in order to cut down the production cost; hence, political conditions of these counties also affect the sales of the company (Apple Inc., 2015). Economic Factors The UK economy symbolizes world’s one of the highest developed economy. However, as an after-effect of the financial crisis of 2008 when the economy became debt-burdened, the Bank of England rectified policy regulations in order to revitalize the macro-prudential circumstance of the economy. Under such favorable governmental regulation and uniform average economic growth rate, the individuals’ possess a decent purchasing power. Sound purchasing power of the UK citizens accelerates the sale of Apple smart phones. When the unemployment rose during the recession period, the sale of Apple products considerably decreased as a result of shrink in the national disposable income. Nevertheless, as the economy has been able to absorb the trauma and progressing towards excellence in terms of reduced inflation, unemployment rate, accelerated economic growth rate, it has created a favorable market for Apple’s smart phone (Apple Inc., 2015). Social Factors A number of social factors have contributed towards the growth and acceptance of Apple smartphones. Being one of the First World Countries, the standard of living of most of the UK citizens is very high. Such high standard of living combined with high purchasing power has increased the demand for Apple iPhone. Apart from that, the growth of the UK music industry and parallel development of iTunes store further enhanced social demand of the smartphones. Consequently, the Apple smartphones has become status symbols for the youth population of the UK citizens (Apple Inc., 2015). Technological Considerations The innovation of Apple iPhone 6 and iPhone 6 Plus itself is the evidence of the company’s inclination towards exploiting technology as much as possible and present the most innovative and technology oriented products to the consumers. Each year, the company invests huge amount in research and development so that they can come up with additionally improved smartphones with distinct features (Cohen, 2010). Environmental Factors The UK holds commanding position in global policy formulations regarding agreements of environmental protection. Hence, any company operating in the UK must comply with the environmental regulations synchronized by the country. Apple Inc. is also not an exception. As the level of air pollution is very high in the UK, the European Commission has placed stringent regulations on all the industries to reduce the degree of air pollution. Hence, the manufacturing units of Apple pay strict attention on controlling the emission of NO2 and other harmful gasses during the production process (Tilson and Lyytinen, 2012). Legal Issues The legal system of the UK is transparent and efficient, securing the interest of all corporate and individual. Apple Inc always strives to align with the legislation prescribed by the country. For instance, while launching iPhone 6 or iPhone 6 Plus, Apple complies with the Consumer Protection Act and place the price of the product accordingly. The company also abides by the laws enforced by Employment Act to protect the interests of their employees (Cohen, 2010). 2.5. Key Global Factors and EU policies that influence UK Businesses The domestic and international business of the United Kingdom is influenced by a number of global factors such as financial crisis, civil wars, changes in KYOTO protocol of theUnited Nations regarding environmental issues etc (Thompson and Daniel, 2013). The United Kingdom, being a major participant of World Trade Organization (WTO), is largely aided by the institution to liberalize its international trade and establish stable trade relationship with other countries. The policy regulations prescribed by the European Union (EU) deeply impacts the businesses of the United Kingdom. Though there is no definite cost-benefit relationship between the UK and EU, it can be said that the UK economy has been influenced by EU policies in multiple ways. The single market program of EU has facilitated economic integration of the UK market. Overtime, UK has also gained competitive position in negotiations regarding trade and investment agreements with non-EU members. The Common Agricultural Policy initiated by EU has helped the economy to reduce their inflationary pressure. Relaxation in external tariffs has attracted many foreign investors to establish and expand business in the UK economy. Considering all such factors, it can be inferred that UK’s exit from European Union may leave an adverse impact on the British businesses and the global economy as a whole. UK is the biggest trading partner of EU. Though it is true that UK alone is efficient enough in building trading relationships with other nations to maintain their international trade, it should also be considered by the country that large trading agreements are incorporated by the commissions like EU only and not by the nations. Therefore, in order to continue and accelerate the international trade, UK must reconsider their contemplation of exiting EU (Thompson and Daniel, 2013). 3. Conclusion In depth analysis of economic systems and the method of resource allocation have shown that the reason behind the UK economy to be one of the most successful economies in the world can be signified as the country’s decision to implement centrally planned economic systems. The economic system facilitates optimum resource allocation by both the public and private sectors of the country that accelerates further economic growth. Such economic system of the United Kingdom is assisted by the competition policies adapted by the economy. The report has also shown that how one of the global premium companies, Apple Inc. has become successful by operating in the favorable market condition of the UK economy. In summation, application of pertinent regulations by the Bank of England and other governing bodies of the United Kingdom has facilitated the country for smooth progression of the economy. References Andrews. D. & Criscuolo., C. (2013). Knowledge-Based Capital, Innovation and Resource Allocation. Paris: OECD. Apple Inc., 2015. iPhone 6- Bigger than Better. Retrieved from https://www.apple.com/iphone-6/. Boyne, G. (2002). Public and Private Management: What’s the Difference? Journal of Management Studies, 39(1), 97-122. Cohen, W. (2010). Fifty Years of Empirical Studies of Innovative Activity and Performance. Handbook of the Economics of Innovation, 1(2), 129–213. Cullen, P. (2011). Strategic international management (5th Ed.). Sidney: South-Western Cengage Learning. DePamphilis, D. (2010). Mergers and Acquisitions Basics: All You Need To Know. New York: Academic Press. Glowik, M and Smyczek, S. (2011). International Marketing Management: Strategies, Concepts and Cases in Europe. 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