BMP4003 Business Environment

BSc (Hons) Business Management

BUSINESS ENVIRONMENT

MODULE NO: BMP4003

Section A

Explain how an efficient fiscal policy can affect the economy.

Fiscal policy refers to the use of states spending, taxation system, and borrowing to influence the economy. An efficient fiscal policy can have a significant impact on the economy in several ways:

• Economic growth: Fiscal policy could generate demand and boost economic growth by raising government expenditure and decreasing taxation. This can lead to more corporate investment, increased employment, and better salaries (Brash, 2018).
• Inflation: Fiscal policy could lower demand and manage inflation by reducing government expenditure and increasing taxes. This can assist stabilize pricing and guarantee the economy's long-term viability (He, 2013).
• Income redistribution: Fiscal policy can be employed to redistribute income by raising taxes on high-income earners and giving targeted aid to low-income people and families. This can assist to minimize economic disparity and promote social fairness (He, 2013).
• Infrastructure investment: By boosting government expenditure on infrastructure such as roads, bridges, and public transit, fiscal policy may enhance overall economic output and create employment in the short term (He, 2013).
• Investing in education and research: By boosting government expenditure on education and research, fiscal policy may enhance long-term economic growth by expanding workforce skills and knowledge and stimulating innovation (He, 2013).

Explain methods and routes in which a government may use to promote economic growth.

There are several methods and routes that a government can use to promote economic growth. For example;

• Fiscal policy: Fiscal policy is the use of governments expenditures and taxation to boost economic activity. Governments can raise investment on infrastructure, education, and research to create jobs and boost the economy's overall productivity. They can also lower taxes in order to enhance disposable income and consumer expenditure (Liu, 2015).
• Monetary policy: Monetary policy is the control of the supply of money and credit in the economy in order to impact interest rates, inflation, and economic growth. Central banks can use interest rates to either encourage borrowing and investment or to manage inflation (Liu, 2015).
• Trade policy: Governments can encourage economic growth by liberalizing international trade and seeking free trade agreements with other countries. This can stimulate economic activity by increasing the export of goods and services (Liu, 2015).
• Investment in technology and innovation: Governments can offer financing for research and development to facilitate technological advances. This has the potential to generate new industries, goods, and services, as well as stimulate economic growth (Vdovychenko, 2017).
• Support for SME: Governments can give cash, tax breaks, and other incentives to SMEs to support entrepreneurship and small business growth. This has the potential to generate new jobs and boost economic activity (Vdovychenko, 2017).
• Regulatory and legal reform: To promote economic growth, governments might modify rules and laws. These can involve simplifying the business registration procedure, minimizing bureaucracy, and preserving property rights.

Identify and briefly explain the main effects of increasing interest rate on the economy?

Increasing interest rates can have several effects on the economy:

• Increasing borrowing costs: As interest rates rise, so does the cost of borrowing money. This can result in lower borrowing, as well as fewer investment and consumption spending.
• Decreased business investment: Increased interest rates can result in greater borrowing costs for firms, lowering their desire to invest in new projects or expand existing operations. This may result in slower economic growth and job creation (Vdovychenko, 2017).
• Reduced inflation: Inflation can be reduced by raising interest rates, which reduces demand for goods and services. It can contribute to stabilizing pricing and guarantee the economy's long-term viability.
• Currency appreciation: Higher interest rates might attract foreign investment, causing the currency to appreciate. This may raise the cost of exports and lower demand for domestic products and services.
• Increased saving: Rising interest rates can encourage people to save more money since they can earn a better return on their investments. This has the potential to diminish household spending and slow overall economic growth (Vdovychenko, 2017).
• Increasing government borrowing costs: As interest rates rise, so does the cost of borrowing money for the government. This could result in greater government borrowing costs, limiting funds accessible for those other government expenditure goals.

What are the main effects of increasing interest rates on the economy?

Increasing interest rates can have several effects on the economy:

• Borrowing costs rise as interest rates rise. This can result in decreased borrowing levels, as well as fewer investment and consumption spending.
• Increased interest rates can lead to greater borrowing costs for firms, lowering their desire to invest in new projects or grow their company. This can result in slower economic growth and job creation.
• Higher interest rates can help to reduce price inflation by decreasing consumer interest in products and services. This can serve to stabilize pricing and maintain the economy's long-term viability.
• Higher interest rates might attract foreign investment, leading to currency appreciation. This might raise the cost of exports and lower demand for domestic goods and services.
• Rising interest rates can encourage people to save more money since they can earn a better return on their investments. This can restrict consumer spending and slow overall economic growth.
• As interest rates rise, the cost of borrowing money for the government rises as well. This can result in higher government borrowing costs, limiting the amount of money available for other government spending goals (Hayes, 2023).

Discuss the main policies that the government can use to control unemployment?

There are several policies that the government can use to control unemployment:

• Monetary policy: The government may utilize monetary policy to limit inflation, which might impact unemployment indirectly. The central bank may restrict consumer and company expenditure by rising interest rates, which can lead to reduced labour demand and more unemployment (Hayes, 2023).
• Fiscal policy: Fiscal policy may be used by the government to generate jobs and decrease unemployment. Increased government expenditure on infrastructure, education, and job training programs, as well as tax benefits and subsidies for enterprises that generate employment, may all be examples of this (Hayes, 2023).
• Labour market policies: Labour market policies may be used by the government to encourage job development and minimize unemployment. This might include services such as job placement, training programs, and incentives for companies to acquire and retain employees (Britannica, 2023).
• Policies on education and training: The government might invest in education and training programs to enhance employees' skills and raise their employability. This may assist to eliminate structural unemployment, which happens when there is a mismatch between employees' talents and employers' demands (Britannica, 2023).
• Trade policies: Trade policies may be used by the government to encourage job growth and minimize unemployment. This might involve both export promotion and assistance for local sectors that produce employment.
• Policies to encourage economic development: The government may adopt policies to promote economic growth, which can lead to job creation and decrease unemployment. This might involve infrastructure investment, innovation promotion, and attracting foreign investment.

Section B 

Discuss and explain the macroeconomic effects ‘Brexit’ has had on the UK economy.

Brexit has had a significant impact on the country's economy. Here are some of the macroeconomic effects that Brexit has had on the UK economy:

• Economic Uncertainty: One of the most significant repercussions that Brexit has had on the economy of the UK is an increase in the market's volatility. The lack of clarity over the terms of the UK’s exit from the EU has contributed to a drop-in confidence among both businesses and consumers, which has in turn influenced choices regarding investments and patterns of spending (Cornwall, 2023).
• Currency Fluctuations: The Brexit has had a number of significant effects, one of which is the volatility in the value of the pound sterling. Since the referendum in 2016, the value of one pound has significantly decreased in comparison to the value of the United States dollar and other major currencies. This has resulted in greater costs for imports, which in turn have contributed to higher inflation, placing additional strain on people and businesses (Potters, 2023).
• Trade: The UK's trade relations have been impacted as a direct result of Brexit as well. As a result of the United Kingdom's decision to leave the European Union's single market and customs union, it has been required to negotiate new trade accords with a variety of countries. Although though the United Kingdom has signed a number of trade accords, including one with the European Union, the new arrangements have led to an increase in trade barriers as well as bureaucratic hurdles, which has slowed down trade (BBC, 2015).
• Investment: The Brexit referendum has also had an effect on the amount of money that is invested in the UK. Because of the uncertainties surrounding the future relationship between the UK and the EU, some businesses have chosen to postpone or completely scrap their investment plans. In addition, many businesses have moved their operations from the United Kingdom to other nations in the European Union, which has led to a decline in economic activity and the loss of jobs (BBC, 2015).
• Migration: The Brexit has also had an effect on the patterns of migration into and out of the UK. Because of the choice made by the United Kingdom to withdraw from the European Union (EU), immigration laws have been modified, making it more difficult for EU residents to find employment and establish themselves in the United Kingdom. Because of this, the availability of labour has decreased in several industries, including agriculture and the hospitality industry (The Guardian, 2018).

The macroeconomic impacts of Brexit on the economy of the United Kingdom have been complicated and widespread. Although while some industries, such as fishing and certain manufacturing industries, have profited from Brexit, the overall impact has been negative, with slower economic growth, greater inflation, and fewer investment and trade flows. Some industries, such as fishing, have benefited from Brexit.

What is meant by ‘Sustainability’ in economy? Explain how an economy can achieve sustainable growth? What are the challenges to achieve this target?

Sustainability

In the field of economics, the term "sustainability" refers to an economy's capacity to maintain steady economic growth over the long term while also ensuring that its natural resources are protected for future generations (Cornwall, 2023). To put it another way, sustainable economic growth is the promotion of economic development in a manner that does not deplete or harm natural resources, degrade the environment, or generate social disparities. These are the three main factors that contribute to the degradation of the environment.

Here are some ways that an economy can achieve sustainable growth:

• Resource efficiency: Use of resources in a manner that is both effective and efficient is a prerequisite for attaining sustainable economic growth. This includes lowering trash production and increasing recycling rates, in addition to making financial investments in clean technology that uses less energy and produces less pollution (Wallenfeldt, 2023).
• Innovation: The term "innovation" refers to the process through which new ideas and improvements in technology are used to solve existing problems or to create new ones. For instance, the use of renewable energy sources like solar, wind, and hydropower can assist in lowering a nation's dependency on fossil fuels (Wallenfeldt, 2023).
• Sustainable land use: Land use practises have the potential to have a substantial influence on both the natural environment and the natural resources that are available. Some examples of actions that contribute to sustainable land use are the management of forests in a responsible manner, the promotion of sustainable agriculture, and the protection of biological variety (Liu, 2015).
• Social equity: Sustainable economic growth must also be socially equitable, which implies that it should benefit all members of society, regardless of income, gender, or ethnicity. This is because economic growth can only be considered sustainable if it is also socially equitable. This requires ensuring that economic advantages are distributed equitably and encouraging fair labour practises as a means to achieve this goal.

However, there are several challenges to achieving sustainable economic growth, including:

• Short-term thinking: Many firms and officials are focused on economic development in the near term instead of the long-term sustainability of their policies.
• Economic trade-offs: Generating sustainable economic growth may require making trade-offs between achieving economic growth, maintaining social fairness, and protecting the environment.
• Political obstacles: Sustaining sustainable growth frequently calls for considerable policy adjustments, which can be challenging to accomplish in the face of political resistance.
• Lack of data and information: In many circumstances, there is inadequate data and information accessible on the social and environmental implications of economic activities. As a result, it is hard to arrive at decisions for sustainable growth that are informed and based on accurate facts (Liu, 2015).

In general, if one wants to achieve sustainable economic growth, they will need to make a long-term commitment to striking a balance between economic development and social and environmental issues. It is necessary to make a transition towards more sustainable economic practises and policies, as well as a willingness to accept trade-offs, in order to preserve the long-term viability of the economy.

References

1. BBC (2015). Brexit: What you need to know about the UK leaving the EU. [online] BBC News. Available at: https://www.bbc.com/news/uk-politics-32810887 [Accessed 19 Mar. 2023].
2. Brash, D. (2018). Monetary and Fiscal Policy: How an Agreed Inflation Target Affects Fiscal Policy. Economic Papers: A journal of applied economics and policy, 30(1), pp.15–17.
3. Britannica (2023). Fiscal policy | Definition, Examples, Importance, & Facts | Britannica. In: Encyclopædia Britannica. [online] Available at: https://www.britannica.com/topic/fiscal-policy [Accessed 19 Mar. 2023].
4. Cornwall, J.L. (2023). Economic growth | Definition, Examples, Measurement, Importance, & Facts | Britannica. In: Encyclopædia Britannica. [online] Available at: https://www.britannica.com/topic/economic-growth [Accessed 19 Mar. 2023].
5. Hayes, A. (2023). All About Fiscal Policy: What It Is, Why It Matters, and Examples. [online] Investopedia. Available at: https://www.investopedia.com/terms/f/fiscalpolicy.asp [Accessed 19 Mar. 2023].
6. He, Q. (2013). Price Scissors and Economic Growth: The Role of Openness. Pacific Economic Review, 18(1), pp.60–78.
7. Liu, X. (2015). Trade Agreements and Economic Growth. Southern Economic Journal, 82(4), pp.1374–1401.
8. Potters, C. (2023). What Is Economic Growth and How Is It Measured? [online] Investopedia. Available at: https://www.investopedia.com/terms/e/economicgrowth.asp [Accessed 19 Mar. 2023].
9. The Guardian (2018). Brexit | The Guardian. [online] The Guardian. Available at: https://www.theguardian.com/politics/eu-referendum [Accessed 19 Mar. 2023].
10. Vdovychenko, A. (2017). Fiscal Policy Reaction Function and Sustainability of Fiscal Policy in Ukraine. Visnyk of the National Bank of Ukraine, 2017(240), pp.22–35.
11. Wallenfeldt, J. (2023). Brexit | Meaning, Referendum, Date, & Consequences | Britannica. In: Encyclopædia Britannica. [online] Available at: https://www.britannica.com/topic/Brexit [Accessed 19 Mar. 2023].

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