Unit 1.5 - External Environment

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Section 1 - Business Organization and Environment
Unit 1.5 - External Environment

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Section 1 - Business Organization and Environment
Unit 1.5 - External Environment

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What is PEST?

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PEST is an acronym for the Political, Economic, Social, and Technological opportunities and threats of the external environment within which businesses operate.

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What are political issues that can arise?

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Government legislation define the boundaries within which businesses can operate. Examples: employment law, consumer protection rights, copyright and trademark regulations, and policies such as taxation and interest rates.

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What are economic issues that can arise?

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The state of the economy in which businesses operate is determined by inflation, unemployment, economic growth, and international trade.

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What are social issues that can arise?

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Social, cultural, and demographic changes can present both threats and opportunities. E.g. liberal vs. conservative societies, multiculturalism, environmental friendliness

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What are technological issues that can arise?

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Advances in technology can improve productive efficiency. However, high costs can hinder the performance of a business.

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What are threats?

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External factors that can harm a business.

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What are opportunities?

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External factors that can do good to a business.

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What are some opportunities the internet presents?

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1. Speed of access to information
2. Reducing language and cultural barriers
3. Reduced production costs

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What are some threats the internet presents?

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1. Price transparency
2. Online crime
3. Higher costs of production costs
4. Reduced productivity

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What are other opportunities technology brings to businesses?

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1. New working practices
2. Increased productivity
3. Quicker product development time
4. New products and markets
5. Creation of jobs

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What are some threats technology presents to businesses?

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1. Technology is not always reliable
2. Shorter product life cycles
3. Can be costly
4. Job losses

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What to managers need to consider when adopting technology?

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1. Costs
2. Benefits
3. Human relations
4. Recruitment and training

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What is inflation?

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Inflation is the continual rise in the general level of prices in an economy.

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What is demand-pull inflation?

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Inflation that is caused by excessive aggregate demand in the economy.

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What increases a country's aggregate demand?

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Any factor that causes a rise in consumption, investment, government spending or international trade

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What is cost-pull inflation?

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Inflation that is caused by higher costs of production leading to a rise in prices so that firms can maintain their profit margins.

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How does inflation affect the international competitiveness of a country?

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A nation that has a higher inflation rate than its rivals will tend to be less price-competitive when trading overseas. This could lead to a fall in export earnings, lower national output and perhaps higher unemployment.

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What does the unemployment rate measure?

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The proportion of a country's workforce not in official employment.

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What are some policies governments can use to tackle unemployment?

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1. Demand-side policies - directly target the level of aggregate demand in the economy
2. Expansionary fiscal policies - boost the level of consumption
3. Protectionist measures - safeguard domestic businesses from international competition
4. Supply-side policies - increase the level of aggregate supply in the economy.

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What is economic growth?

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An increase in a country's economic activity over time.

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What is Gross Domestic Product (GDP)?

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The total output of a nation's economy per year.

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What is the business cycle?

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The pattern of fluctuations in economic growth.

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List the various phases of the cycle and briefly explain them.

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1. Boom - rise in level of economic activity
2. Recession - when there is a fall in GDP for two consecutive quarters
3. Slump - the bottom of a recession
4. Recovery - when the level of GDP starts to rise again after the economy has experienced a slump
5. Peak - economic activity is at its highest level

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What is a balance of payments?

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It is the record of a country's money inflows and outflows per year.

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What is the exchange rate?

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The exchange rate measures the value of one currency in terms of foreign currencies.

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What is an appreciation of the currency?

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The export prices will be relatively higher thereby reducing the exporter's price competitiveness.

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What is a depreciation of the currency?

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Domestic firms that import raw materials and components will suffer from having to pay higher prices, thereby raising their costs.

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What is protectionism? Give examples

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Any government policy used to safeguard domestic businesses from foreign competitors. Examples: tariffs, quotas, subsidies, and embargos.

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What is the difference between the laissez-faire and the interventionalist approach?

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Laissez-faire (or free market) is when the government rarely intervenes in business activity. Interventionalist approach is when the manage the economy by using legislation and policies to control business behavior.

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What is fiscal policy?

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It is the use of taxation and government expenditure policies to influence the economy.

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What is direct taxation?

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Tax that is paid straight from the income, wealth or profit of an individual or a business.

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What is indirect taxation?

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Tax paid on personal or commercial expenditure.

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What does monetary policy do?

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It is designed to control the amount of spending and invesment in an economy by altering interest rates to affect the money supply and exchange rates.

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What is consumer protection legislation?

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Laws that make it illegal for businesses to provide false or misleading descriptions of their products or services.

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What is employee protection legislation?

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Laws that protect the interest and safety of workers.

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What is competition legislation?

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Laws that ensure that anti-competitive practices are stopped to protect customers and smaller firms from businesses with monopoly power.

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What is social and environmental protection?

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Laws that prevent or reduce to consumption of demerit goods.