1
Economic Environment; Dayna Tye
Introduction
In this essay I will be comparing 1 business that is within 2 different countries
and the economic environments around growth, recession, inflation, changes in
government policy, changes in supply and demand and global interdependence. I
will be comparing Cummins Inc. in the United States and Cummins Power
Generation is the United Kingdom; Cummins Power Generation is a spin off from
the main company in the States. Cummins specialise in the creation of fuel
systems, controls, air handling, filtration, emission control and electrical power
generation systems. The UK business with Cummins specializes in power
generators.
Importance of Stability
Most businesses like to have a stable economy and stable economic conditions.
“Stability exists when business people can make forecasts for the short and
medium term about likely demand for their products in the near future.” Stability
is being able to trust someone whom you are charging on credit to pay you back
the correct amount that was agreed when the item was first purchased. When
someone borrows money, you would expect to be paid back the correct amount.
This applies to my businesses as what they charge for their products are very
high; they would be able to charge someone via credit in order to make it easier
for the customers to pay back what they have bought. Using credit is easy for my
business as they have so much money that even if they weren’t paid back on
time, they may not mind due to their income; although they would like to be able
to trust their customers and hope that all the money is paid back within the time
frame set and in full.
Growth/Recession
Firstly I will start with growth/recession. I will compare the growth of the
company in both countries over several years.
This graph shows that the economy in the UK and the USA are going up. This
chart shows that in the 1970’s, we had our highest GDP growth and in 2009 we
had our lowest GDP growth putting us into recession. By 2010, the economy had
grown considerably so we came out of debt and gained a better and more stable
economy. The US had their highest GDP growth in 1984 whereas the UK fell.
Cummins was affected by the recession in 2009 but they were prepared for it
with reducing costs, managing their cash and investing in key future products
but they were set to come out of it stronger than they were before they went in.
During the recession they did expect their profits to fall by at least 30% after
2008 but as they were prepared, it did not come as a shock to them; the
company were trying to cut back on costs before the recession hit them. To
reduce costs they “cut 7,800 jobs since October 2008, including 1,450 salaried
employees, 3,600 hourly employees and 2,750 contract and temporary workers.
They cut pay 10 percent for corporate officers and board members, and
eliminating merit rises across the Company for 2009. They reduced selling,
administrative and research and development expenses by nearly $120 million
from their peak in the third quarter 2008. They reduced capital spending by 70
percent in the first quarter 2009, from the previous quarter. And they reduced
inventory significantly since the end of the third quarter 2008.” As we can see
DAYNA TYE | YEAR 12 | BTEC L3 EXTENDED DIPLOMA IN BUSINESS STUDIES | 1 – THE BUSINESS
ENVIRONMENT
, 2
the economies are different
although there are many
similarities; for example, both
the United Kingdom and the
United States went into
recession in 2009 but we had a
very high GDP in the 1970’s
whereas the US did not. The
United States had their highest
GDP years after the UK
meaning our economies were in
different places at these times.
Political factors will affect businesses in a variety of ways; political stability will
affect businesses as businesses would like to be able to plan for the coming
years. Having political stability (having a party elected that stays in power for 5
years) is best for businesses as they can decide on future plans within the
business. Having stability provides an environment for businesses in which they
can easily make plans and changes within the business. Legal factors will also
affect businesses in a number of ways; one legal factor that will affect businesses
would be company law. There are many rules about who can open a business,
the steps it takes, the paperwork they must have and how they present their
accounts; most of which is covered by the company law, although the most
important pieces of information are given in the Company Act which covers a
range of different matters. Social factors such as population, religions, education
and ethics (there are several more) may affect businesses also. Population may
affect businesses as if the population decreases, there will not be as many
people looking for jobs. For some businesses, this is good because they do not
need any more employees but for small companies who want to expand and
need more employees, the decrease in population and number of people looking
for jobs will affect them incredibly. If there are not enough people looking for
jobs, they would not be able to take on as much work as they may want too in
order to expand their business.
These are other charts that show the same thing above but in a chart so it is
easier to see what is going on. In the months this chart shows, many of them
have the same pattern. They are not exactly the same but they do have several
parts the same. If the UK decreases, the USA also decreases.
Growth would affect Cummins Inc. and Cummins Power Generation in a positive
way because they would become more confident in spending more money on
better materials for their products. Recession would not affect my business
dramatically unless someone they are supplying cannot pay back their debt.
Growth would benefit Cummins because their customers would be able to spend
more money within the business.
The Ripple Effect
DAYNA TYE | YEAR 12 | BTEC L3 EXTENDED DIPLOMA IN BUSINESS STUDIES | 1 – THE BUSINESS
ENVIRONMENT
, 3
The ripple effect happens when several things are affected by the first. The result
of recession has a ripple effect. In 2008/9 as it was the time in which the UK had
its biggest recession. Many people were coming out of education and then they
were finding it hard to get a job. This is a ripple effect: the country went into
recession, people came out of education, and they found it harder to get a full-
time good paying job. The USA had the same type of thing happen to them; they
too went into recession in 2009. Many people became unemployed due to cut
backs, many people didn’t have enough money to pay health insurance and their
poverty rate went up by 0.9% from the previous year.
The ripple effect would have impacted on my business as both companies would
have had to have made cut backs in the number of staff they employed, in all of
their spending and how many people they take on to make the job happen. The
companies would have had to have made serious changes in order for people to
not lose their jobs and it would become easier on the company to pay staff.
Having to do this could have affected the businesses in both good and bad ways:
making cut backs in their spending means they would be saving more money
than they had previously in order to make sure they had enough money if
anything goes wrong but the bad thing about this is that they may not be able to
buy the products they usually buy if they turn out to be too expensive. Cutting
back the number of people trying to make one thing happen is good as they
would be able to start other projects earlier but it could also mean that the
project may take longer to finish as there are less people participating. And
cutting back on the number of employees again saves them money but then
again, they have less people to help out on a project.
Inflation
These charts show the inflation within
the United Kingdom and the United States. As we can see by these charts, the
UK has a lower inflation rate as of July 2015 with 0 whereas the USA has an
inflation rate of 0.2 as of July 2015. With the low inflation rates, it give
businesses more confidence because more people are confident to spend money
as they think they have more money than they actually do. The government from
the UK has said that the inflation rates will go up in December/January which
mean the cost of living will go up and many businesses will stop spending
money; this also means customers will stop spending money because they know
they do not have as much money as they thought they did. The low inflation rate
in the US is also keeping businesses confident and keeping customers spending.
Availability and Cost of Credits
The cost of credit is called the interest rate (borrowing money). Interest rates are
always expressed as a percentage (%). If interest rates rise, it will harm
businesses as they will have to pay out more and won’t make as larger profit as
they hoped. If a business is close to break-even, the interest rates rises is bad as
DAYNA TYE | YEAR 12 | BTEC L3 EXTENDED DIPLOMA IN BUSINESS STUDIES | 1 – THE BUSINESS
ENVIRONMENT
, 4
they will then not make a profit as quickly as they wish too. For my businesses,
the cost of credit/interest rates will impact my business as they have to pay out
large amounts of money for their products. It will not affect them as much
because they are a billion dollar company (gaining $19.2B in December 2014)
and they have a lot of customers whom keep asking them for business.
Labour
Labour market: this consists of employers requiring (demand) employees and
people seeking work (supply). For most businesses the wage bill takes up about
60-70% of their costs. Businesses need to employee people with the right skill for
the right job at the right wage in order to keep their business where they want it
revenue wise. In recession it is much easier for businesses to recruit as there are
many people jobless but during the growth period, the labour market shortages
occur and wages rise.
Changes in Government Policy
- Monetary Policy: policies related to money available in the economy. The
government can change the quantity of available money or the cost of
borrowing money (interest rate) as a result of advice from the MPC
(monetary policy committee).
- Quantitative Easing: increasing the quantity of money in the economy
- Fiscal Policy: policies involving changes in government spending and
government taxation
The monetary policy became popular in the United Kingdom in 2009 when the
Bank of England started to increase the money in the country. This is quantitative
easing; the government gave more money to banks in order to give money to
businesses. The government wanted to give businesses more money so they
could increase the amount of money in the economy. They were trying to
convince businesses to borrow more money in order to expand; this is known as
fiscal policy. Governments would keep giving out money in order for them to
keep lending.
Demand
Demand is a term used to describe the number of people who want/require a
product/service. Consumers will buy more of the same product/service if it a
cheap price and stays that price. Demand can be calculated using a demand
schedule. A demand schedule is a table that lists various quantities of a product
or service that someone is willing to buy over a range of possible prices (the
cheaper the product, the more people will buy it). This schedule can be put onto
a graph; the connected dots are known as the demand curve. The demand curve
shifts due to buyers, income, tastes, expectations and related goods. There are a
number of factors that influence the demand of a product: affordability,
competition and availability of substitutes, level of income, and needs and
aspirations of consumers. These impact the business as they affect profit and
total income for the business.
Affordability effects a business as the lower the price of a product, the more
people would be willing to buy it. Competition and availability of substitutes
affect a business as many businesses try to compete with other businesses for
customer purchases and businesses try to have as many substitutes as possible
in order to keep customers happy. Level of GDP (income) affects a business as
DAYNA TYE | YEAR 12 | BTEC L3 EXTENDED DIPLOMA IN BUSINESS STUDIES | 1 – THE BUSINESS
ENVIRONMENT
Economic Environment; Dayna Tye
Introduction
In this essay I will be comparing 1 business that is within 2 different countries
and the economic environments around growth, recession, inflation, changes in
government policy, changes in supply and demand and global interdependence. I
will be comparing Cummins Inc. in the United States and Cummins Power
Generation is the United Kingdom; Cummins Power Generation is a spin off from
the main company in the States. Cummins specialise in the creation of fuel
systems, controls, air handling, filtration, emission control and electrical power
generation systems. The UK business with Cummins specializes in power
generators.
Importance of Stability
Most businesses like to have a stable economy and stable economic conditions.
“Stability exists when business people can make forecasts for the short and
medium term about likely demand for their products in the near future.” Stability
is being able to trust someone whom you are charging on credit to pay you back
the correct amount that was agreed when the item was first purchased. When
someone borrows money, you would expect to be paid back the correct amount.
This applies to my businesses as what they charge for their products are very
high; they would be able to charge someone via credit in order to make it easier
for the customers to pay back what they have bought. Using credit is easy for my
business as they have so much money that even if they weren’t paid back on
time, they may not mind due to their income; although they would like to be able
to trust their customers and hope that all the money is paid back within the time
frame set and in full.
Growth/Recession
Firstly I will start with growth/recession. I will compare the growth of the
company in both countries over several years.
This graph shows that the economy in the UK and the USA are going up. This
chart shows that in the 1970’s, we had our highest GDP growth and in 2009 we
had our lowest GDP growth putting us into recession. By 2010, the economy had
grown considerably so we came out of debt and gained a better and more stable
economy. The US had their highest GDP growth in 1984 whereas the UK fell.
Cummins was affected by the recession in 2009 but they were prepared for it
with reducing costs, managing their cash and investing in key future products
but they were set to come out of it stronger than they were before they went in.
During the recession they did expect their profits to fall by at least 30% after
2008 but as they were prepared, it did not come as a shock to them; the
company were trying to cut back on costs before the recession hit them. To
reduce costs they “cut 7,800 jobs since October 2008, including 1,450 salaried
employees, 3,600 hourly employees and 2,750 contract and temporary workers.
They cut pay 10 percent for corporate officers and board members, and
eliminating merit rises across the Company for 2009. They reduced selling,
administrative and research and development expenses by nearly $120 million
from their peak in the third quarter 2008. They reduced capital spending by 70
percent in the first quarter 2009, from the previous quarter. And they reduced
inventory significantly since the end of the third quarter 2008.” As we can see
DAYNA TYE | YEAR 12 | BTEC L3 EXTENDED DIPLOMA IN BUSINESS STUDIES | 1 – THE BUSINESS
ENVIRONMENT
, 2
the economies are different
although there are many
similarities; for example, both
the United Kingdom and the
United States went into
recession in 2009 but we had a
very high GDP in the 1970’s
whereas the US did not. The
United States had their highest
GDP years after the UK
meaning our economies were in
different places at these times.
Political factors will affect businesses in a variety of ways; political stability will
affect businesses as businesses would like to be able to plan for the coming
years. Having political stability (having a party elected that stays in power for 5
years) is best for businesses as they can decide on future plans within the
business. Having stability provides an environment for businesses in which they
can easily make plans and changes within the business. Legal factors will also
affect businesses in a number of ways; one legal factor that will affect businesses
would be company law. There are many rules about who can open a business,
the steps it takes, the paperwork they must have and how they present their
accounts; most of which is covered by the company law, although the most
important pieces of information are given in the Company Act which covers a
range of different matters. Social factors such as population, religions, education
and ethics (there are several more) may affect businesses also. Population may
affect businesses as if the population decreases, there will not be as many
people looking for jobs. For some businesses, this is good because they do not
need any more employees but for small companies who want to expand and
need more employees, the decrease in population and number of people looking
for jobs will affect them incredibly. If there are not enough people looking for
jobs, they would not be able to take on as much work as they may want too in
order to expand their business.
These are other charts that show the same thing above but in a chart so it is
easier to see what is going on. In the months this chart shows, many of them
have the same pattern. They are not exactly the same but they do have several
parts the same. If the UK decreases, the USA also decreases.
Growth would affect Cummins Inc. and Cummins Power Generation in a positive
way because they would become more confident in spending more money on
better materials for their products. Recession would not affect my business
dramatically unless someone they are supplying cannot pay back their debt.
Growth would benefit Cummins because their customers would be able to spend
more money within the business.
The Ripple Effect
DAYNA TYE | YEAR 12 | BTEC L3 EXTENDED DIPLOMA IN BUSINESS STUDIES | 1 – THE BUSINESS
ENVIRONMENT
, 3
The ripple effect happens when several things are affected by the first. The result
of recession has a ripple effect. In 2008/9 as it was the time in which the UK had
its biggest recession. Many people were coming out of education and then they
were finding it hard to get a job. This is a ripple effect: the country went into
recession, people came out of education, and they found it harder to get a full-
time good paying job. The USA had the same type of thing happen to them; they
too went into recession in 2009. Many people became unemployed due to cut
backs, many people didn’t have enough money to pay health insurance and their
poverty rate went up by 0.9% from the previous year.
The ripple effect would have impacted on my business as both companies would
have had to have made cut backs in the number of staff they employed, in all of
their spending and how many people they take on to make the job happen. The
companies would have had to have made serious changes in order for people to
not lose their jobs and it would become easier on the company to pay staff.
Having to do this could have affected the businesses in both good and bad ways:
making cut backs in their spending means they would be saving more money
than they had previously in order to make sure they had enough money if
anything goes wrong but the bad thing about this is that they may not be able to
buy the products they usually buy if they turn out to be too expensive. Cutting
back the number of people trying to make one thing happen is good as they
would be able to start other projects earlier but it could also mean that the
project may take longer to finish as there are less people participating. And
cutting back on the number of employees again saves them money but then
again, they have less people to help out on a project.
Inflation
These charts show the inflation within
the United Kingdom and the United States. As we can see by these charts, the
UK has a lower inflation rate as of July 2015 with 0 whereas the USA has an
inflation rate of 0.2 as of July 2015. With the low inflation rates, it give
businesses more confidence because more people are confident to spend money
as they think they have more money than they actually do. The government from
the UK has said that the inflation rates will go up in December/January which
mean the cost of living will go up and many businesses will stop spending
money; this also means customers will stop spending money because they know
they do not have as much money as they thought they did. The low inflation rate
in the US is also keeping businesses confident and keeping customers spending.
Availability and Cost of Credits
The cost of credit is called the interest rate (borrowing money). Interest rates are
always expressed as a percentage (%). If interest rates rise, it will harm
businesses as they will have to pay out more and won’t make as larger profit as
they hoped. If a business is close to break-even, the interest rates rises is bad as
DAYNA TYE | YEAR 12 | BTEC L3 EXTENDED DIPLOMA IN BUSINESS STUDIES | 1 – THE BUSINESS
ENVIRONMENT
, 4
they will then not make a profit as quickly as they wish too. For my businesses,
the cost of credit/interest rates will impact my business as they have to pay out
large amounts of money for their products. It will not affect them as much
because they are a billion dollar company (gaining $19.2B in December 2014)
and they have a lot of customers whom keep asking them for business.
Labour
Labour market: this consists of employers requiring (demand) employees and
people seeking work (supply). For most businesses the wage bill takes up about
60-70% of their costs. Businesses need to employee people with the right skill for
the right job at the right wage in order to keep their business where they want it
revenue wise. In recession it is much easier for businesses to recruit as there are
many people jobless but during the growth period, the labour market shortages
occur and wages rise.
Changes in Government Policy
- Monetary Policy: policies related to money available in the economy. The
government can change the quantity of available money or the cost of
borrowing money (interest rate) as a result of advice from the MPC
(monetary policy committee).
- Quantitative Easing: increasing the quantity of money in the economy
- Fiscal Policy: policies involving changes in government spending and
government taxation
The monetary policy became popular in the United Kingdom in 2009 when the
Bank of England started to increase the money in the country. This is quantitative
easing; the government gave more money to banks in order to give money to
businesses. The government wanted to give businesses more money so they
could increase the amount of money in the economy. They were trying to
convince businesses to borrow more money in order to expand; this is known as
fiscal policy. Governments would keep giving out money in order for them to
keep lending.
Demand
Demand is a term used to describe the number of people who want/require a
product/service. Consumers will buy more of the same product/service if it a
cheap price and stays that price. Demand can be calculated using a demand
schedule. A demand schedule is a table that lists various quantities of a product
or service that someone is willing to buy over a range of possible prices (the
cheaper the product, the more people will buy it). This schedule can be put onto
a graph; the connected dots are known as the demand curve. The demand curve
shifts due to buyers, income, tastes, expectations and related goods. There are a
number of factors that influence the demand of a product: affordability,
competition and availability of substitutes, level of income, and needs and
aspirations of consumers. These impact the business as they affect profit and
total income for the business.
Affordability effects a business as the lower the price of a product, the more
people would be willing to buy it. Competition and availability of substitutes
affect a business as many businesses try to compete with other businesses for
customer purchases and businesses try to have as many substitutes as possible
in order to keep customers happy. Level of GDP (income) affects a business as
DAYNA TYE | YEAR 12 | BTEC L3 EXTENDED DIPLOMA IN BUSINESS STUDIES | 1 – THE BUSINESS
ENVIRONMENT
