Acca F1 free essay sample

Session Objectives Topic 10 Macroeconomic Factors Define macro-economic policy Explain the main determinants of the level of business activity in the economy and how variations in the level of business activity affect individuals, households and businesses  © accountingclassroom. com 2008 Student Notes for ACCA F1-Accountant in Business  © accountingclassroom. com 2008 Student Notes for ACCA F1-Accountant in Business Session Objectives Explain the impact of economic issues on the individual, the household and the business: i) Inflation ii) Unemployment iii) Stagnation iv) International payments disequilibrium Session Objectives Describe the main types of economic policy that may be implemented by government and supra-national bodies to maximise economic welfare Recognise the impact of fiscal and monetary policy measures on the individual, the household and businesses  © accountingclassroom. com 2008 Student Notes for ACCA F1-Accountant in Business  © accountingclassroom. com 2008 Student Notes for ACCA F1-Accountant in Business Macroeconomics It is the study of how society allocates scarce resources which have alternative uses, between competing ends. It focuses on: Overall demand for goods and services Output of goods and services Supply of factors of production Total incomes earned by providers of factors of production Difference between Macro- and Micro-economics Microeconomics –study of economic behaviour of individual consumers, firms and industries Macroeconomics – Considers aggregate behaviour and the sum of individual economic decisions  © accountingclassroom. com 2008 Student Notes for ACCA F1-Accountant in Business  © accountingclassroom. com 2008 Student Notes for ACCA F1-Accountant in Business Macroeconomic Policy Objectives Economic Growth Inflation Unemployment Balance of Payments Factors Influencing Level of Business Activity Confidence Aggregate demand Capital Use of Resources Government Policy Exchange Rate Movements  © accountingclassroom. com 2008 Student Notes for ACCA F1-Accountant in Business  © accountingclassroom. com 2008 Student Notes for ACCA F1-Accountant in Business Confidence Greater Consumer confidence lead to higher business confidence and higher investment in new factories Confidence is adversely affected by political instability, disasters, unemployment, inflation Aggregate Demand It is the total demand for the country’s output It is calculated as: AD = Consumer spending + Investment by firms + Government spending + Demand from exports – imports Higher demand results in firms increasing output Higher demand can result in inflationary pressure  © accountingclassroom. com 2008 Student Notes for ACCA F1-Accountant in Business  © accountingclassroom. com 2008 Student Notes for ACCA F1-Accountant in Business Capital Firms need finance to invest in new projects Greater availability of finance results in higher investments Lower interest rates will make capital cheaper Use of Resources New Technology and more efficient working practices can improve productivity and lower costs Advances in level of education  © accountingclassroom. com 2008 Student Notes for ACCA F1-Accountant in Business  © accountingclassroom. com 2008 Student Notes for ACCA F1-Accountant in Business Government Policy Governments can increase or decrease the level of aggregate demand through fiscal policy Investment in the infrastructure of the economy can attract investment Exchange Rate Movements Strengthening currency will make a country’s exports more expensive Imports will get cheaper accountingclassroom. com 2008 Student Notes for ACCA F1-Accountant in Business  © accountingclassroom. com 2008 Student Notes for ACCA F1-Accountant in Business Trade Cycles Trade Cycles Recession starts when demand begins to fall. Reduction in demand feeds into household incomes and the economy moves into a slump Slowly economic activity begins to pickup and the economy moves to re covery. The economy will expand pushing upwards into boom.  © accountingclassroom. com 2008 Student Notes for ACCA F1-Accountant in Business  © accountingclassroom. com 2008 Student Notes for ACCA F1-Accountant in Business Stagnation and Economic Growth Growth implies: More goods demanded and produced People earn more and can afford more goods More people should have jobs Problems with Growth Growth may not keep up with population growth Growth rates should exceed inflation rates for benefits to arise Growth may be in illegal goods like drugs Gap between haves and have nots may grow Measurement of growth is difficult given the existence of black market Rapid growth means rising incomes and leads to imports thus worsening BOP condition accountingclassroom. com 2008 Student Notes for ACCA F1-Accountant in Business  © accountingclassroom. com 2008 Student Notes for ACCA F1-Accountant in Business Inflation Government wants stable prices and low inflation because: Inflation causes uncertainty and stifles investment Not all incomes rise in line with inflation Inflation may cause civil unrest Unemployment Unemployment is a problem because: Unemployment benefi ts Rise in crime Waste of human resources  © accountingclassroom. com 2008 Student Notes for ACCA F1-Accountant in Business  © accountingclassroom. om 2008 Student Notes for ACCA F1-Accountant in Business Balance of Payment It is a statement of the balance of a countrys trade and financial transactions with the rest of the world over a specific period usually a year. A long-term trade deficit needs to be financed. A long-term trade can lead to inflationary surpluses leading to loss in international confidence Economic Policy Options Fiscal Policy options Monetary policy options Demand and supply side policies  © accountingclassroom. com 2008 Student Notes for ACCA F1-Accountant in Business accountingclassroom. com 2008 Student Notes for ACCA F1-Accountant in Business Fiscal Policy options Fiscal policy refers to government’s taxation and spending plans. It includes: A balanced budget: In the medium to long term, government should aim to achieve a balanced budget Govern ment income = Government Expenditure Fiscal Policy options  © accountingclassroom. com 2008 Student Notes for ACCA F1-Accountant in Business  © accountingclassroom. com 2008 Student Notes for ACCA F1-Accountant in Business Running a Budget Deficit Govt income ; Govt expenditure = Budget deficit Budget deficit is financed through borrowing It is referred to as the Public Sector Net Cash Requirement It is often used to close a deflationary gap Running a Budget Deficit Deflationary gap is said to exist when the current equilibrium level of national income is too low to provide employment opportunities for all those seeking work The government follows an expansionary policy to boost demand and reduce unemployment  © accountingclassroom. com 2008 Student Notes for ACCA F1-Accountant in Business  © accountingclassroom. om 2008 Student Notes for ACCA F1-Accountant in Business Running a Balanced Surplus Govt income ; Govt expenditure = Budget surplus This may lead to inflation Inflationary gap exists Government follows a contractionary policy to reduce aggregate demand Monetary Policy Options Monetary policy refers to management of money supply in the economy. It can involve: Changing interest rates Setting reserve requirements fo r banks Trading in foreign exchange markets  © accountingclassroom. com 2008 Student Notes for ACCA F1-Accountant in Business  © accountingclassroom. com 2008 Student Notes for ACCA F1-Accountant in Business Expansionary / Contractionary Monetary Policy Expansionary increases the money supply and contractionary decreases it Expansionary combats unemployment in a recession and contractionary raises interest rates to combat inflation Money Supply Money supply is the total amount of money in the economy. Measures of money supply include: M0 = Notes and coins in circulation and balances at the country’s Central Bank M4= Notes and coins and all private sector sterling bank / building society deposits  © accountingclassroom. com 2008 Student Notes for ACCA F1-Accountant in Business  © accountingclassroom. com 2008 Student Notes for ACCA F1-Accountant in Business Reserve Requirements Banks operate a fractional reserve system. Only a part of their deposit is kept in cash. The proportion of deposits retained in cash is known as the reserve asset ratio or liquidity ratio. Open Market Operations By buying and selling its own bonds the government is able to exert some control over the money supply By buying back its bonds, it will release more cash By selling it will reduce the money in circulation accountingclassroom. com 2008 Student Notes for ACCA F1-Accountant in Business  © accountingclassroom. com 2008 Student Notes for ACCA F1-Accountant in Business Interest Rates High interest rates suppress demand for money due to increased cost of borrowing. Over a period of time the money supply will react to this reduced demand for money by contracting. In UK interest rates are set by Central bank o o o Demand and Suppl y Side Policies Classical view (Do nothing) Keynesian View (Demand Side) Monetarist view (Supply Side)  © accountingclassroom. com 2008 Student Notes for ACCA F1-Accountant in Business  © accountingclassroom. com 2008 Student Notes for ACCA F1-Accountant in Business Achieving Policy Objectives: Growth Cut interest rates Running a budget deficit Supply side policies (Increase the availability of skilled labour through training schemes etc Others: Protectionist measures to reduce imports Creating a stable economy Tax incentives to boost growth  © accountingclassroom. com 2008 Student Notes for ACCA F1-Accountant in Business Achieving Policy Objectives: Unemployment Cyclical unemployment Unemployment is due to small demand to create employment Monetarist can reduce this unemployment by supply-side measures Frictional Unemployment People who move from job to job are short term unemployed Can be reduced by a provision of better information through job centres and supply policies  © accountingclassroom. com 2008 Student Notes for ACCA F1-Accountant in Business Achieving Policy Objectives: Unemployment Structure and Technological Unemployment Caused due to structural change in economy leading to change in skills required Supply side policies will be more effective †¢ †¢ †¢ †¢ Government unded retraining schemes Business start up advice and soft loans Help with worker relocation costs Improved information on employment opportunities Student Notes for ACCA F1-Accountant in Business Achieving Policy Objectives: Unemployment Seasonal Unemployment Creates highly seasonal demand for workers Real Wage Unemployment Occur in industries that are highly unioni sed By keeping wages artificially high by the threat of strike action and closed shops, the number of people employed in the industry is reduced  © accountingclassroom. com 2008 Student Notes for ACCA F1-Accountant in Business  © accountingclassroom. om 2008 Achieving Policy Objectives: Inflation Demand-pull inflation If demand for goods and services in the economy is growing faster than the ability of the economy to supply these goods and services, prices will increase Demand side policies would focus on reducing aggregate demand through tax rises, cuts in government spending and higher interest rates Achieving Policy Objectives: Inflation Cost-push inflation If the underlying cost of factors of production increases, this is likely to be reflected in an increase in output prices as firms seek to maintain their profit margin  © accountingclassroom. om 2008 Student Notes for ACCA F1-Accountant in Business  © accountingclassroom. com 2008 Student Notes for ACCA F1-Accountant i n Business Achieving Policy Objectives: Inflation Imported inflation A weakening of the national currency will increase the cost of imports and lead to domestic inflation This can be reduced by policies to strengthen the national currency Achieving Policy Objectives: Inflation Monetary inflation Inflation can result from over expansion of money supply as it increases the purchasing power If the expansion is faster than the supply of goods it will lead to inflation accountingclassroom. com 2008 Student Notes for ACCA F1-Accountant in Business  © accountingclassroom. com 2008 Student Notes for ACCA F1-Accountant in Business Achieving Policy Objectives: Balance of Payments Balance of Payment Deficits Expenditure reducing strategies: Shrink the domestic economy and thus reduce demand for imports Expenditure switching strategies: †¢ †¢ †¢ Import controls Boost exports Lower exchange rates or devaluation in case of fixed exchange rates  © accountingclassroom. com 2008 S tudent Notes for ACCA F1-Accountant in Business