ACCA BT Syllabus A. The Business Organisation And Its External Environment - Business Activity in the Economy - Notes ^{2 / 4}

An interesting factor is the multiplier.

A multiplier is basically a factor of proportionality that measures how much an X variable changes in response to a change in some Y variable.

Determinants of the level of Business Activity

1. Confidence

   When consumers are confident, they tend to demand more whilst higher business confidence results in higher investment.  

   Confidence is generally put at a threat when there is political instability, disasters, unemployment and high inflation.

2. Aggregate Demand

   • AD = C + I + G + X – M

     • AD – Aggregate Demand

     • C – Consumer Spending

     • I – Investment by firms

     • G – Government Spending

     • X – Demand for exports

     • M – Imports

   • Balance of Payments

     Under the current method of presentation of the UK balance of payments statistics, current account transactions are sub-divided into four parts.

     • Trade in goods

     • Trade in services

     • Income

     • Transfers.

   • When journalists on economists speak of the balance of payments they are usually referring to the deficit or surplus on the current account.

     The government of a country with a balance of payments deficit will usually be expected to take measures to reduce or eliminate the deficit by one or more of the following measures:

     • A depreciation of the currency known as devaluation

     • Direct measures to restrict imports, such as tariffs or import quotas or exchange control regulations

     • Domestic deflation to reduce aggregate demand in the domestic economy

       The first two are expenditure switching policies which transfer resources and expenditure away from imports and towards domestic products while the last is an expenditure reducing policy.

3. Capital

   If firms raise their finance it will result in higher levels of investment.  

   Lower interest rates will make capital cheaper.

4. Use of Resources

   Advancements in technology results in efficient work practices and can improve productivity.  

   A well-educated work force can also result in better and more productive work.

5. Government Policy

   Government can affect aggregate demand through fiscal policy (the blend of government spending and taxation).  

   If Government spending increases then the overall aggregate demand will increase

6. Exchange Rate Movements

   A strengthening currency will make exports of a particular country more expensive and in that case imports will result to be cheaper.

What are the impacts of having an appreciating (strengthening) currency?

1. Exports are hurt.

   Most developing countries have economies based largely on exports that are competitive in global markets because of low prices. 

   A case in point nowadays is China. 

   When those countries’ currency gains in value, they are no longer able to offer exports to the global market at the same low prices that they planned to. 

   This may cause importers (of other countries) to look elsewhere, to countries with lower valued currency resulting in better prices. 

   It may also be the case that the importers will start ordering less from the said country having an appreciating currency.

2. Repatriated profits from a country’s international economic activity are hurt.

   Currency appreciation at home means that money made elsewhere won’t stretch as far in supporting the domestic economy