Financial and Economic Literacy for Managers

This article covers topics related to financial and economic literacy for managers including globalisation, demand and supply side policies, market structures, and costing concepts and budgeting techniques.

Running Head: Financial And Economy Literacy for Managers
Financial and Economic Literacy

Financial And Economy Literacy for Managers 1
Table of Contents
Question 1.............................................................................................................................................3
Introduction.......................................................................................................................................3
Impact of globalisation on the economies..........................................................................................3
Rise of Multinational corporations because of Globalisation.............................................................3
Real world examples of companies that have adopted the concept of globalisation..........................4
Conclusion.........................................................................................................................................4
Question 2.............................................................................................................................................6
Introduction.......................................................................................................................................6
Demand Sided Policies......................................................................................................................6
 Monetary policy.....................................................................................................................6
 Fiscal policy...........................................................................................................................7
Supply Side Policies..........................................................................................................................8
 Infrastructural development..................................................................................................8
 Cutting Corporation Tax:........................................................................................................9
Conclusion.........................................................................................................................................9
Question 3...........................................................................................................................................10
Market Structures............................................................................................................................10
 Perfect Competition.............................................................................................................10
 Imperfect Competition.........................................................................................................10
 Oligopoly.............................................................................................................................10
 Monopoly............................................................................................................................10
Concept of Demand in Market.........................................................................................................10
Concept of Supply in Market...........................................................................................................12
Question 4...........................................................................................................................................14
Introduction.....................................................................................................................................14
Use of costing concepts and budgeting techniques by managers.....................................................14
Conclusion.......................................................................................................................................16
Question 5...........................................................................................................................................17
Part a) Amortisation Schedule.............................................................................................................17
Part b) Present value of required deposit calculation...........................................................................17
Part c) Evaluation of alternative projects.............................................................................................18
References:..........................................................................................................................................19

Financial And Economy Literacy for Managers 2
Table of Figures:
Figure 1: UK Net Borrowing -% of GDP..............................................................................................7
Figure 2: Demand Curve for Gasoline Product....................................................................................11
Figure 3: Supply Curve for Gasoline Product......................................................................................12

Financial And Economy Literacy for Managers 3
Question 1
Introduction
Globalisation simply means that corporations have global presence. In the recent era, the
scope of concept of globalisation has become wide due to the advancement of technology that
has allowed the organisations to touch the boundaries of international economy. In economic
terms, the term globalisation implies to the enhanced economic integration across the world
due to major components of nation’s economy such as its trade, investments and funds are
increasingly crossing the global borders.
Impact of globalisation on the economies
The effect of globalisation can be seen on various areas such as financial market
interdependence, enhanced role of multinational companies, technology transfers from one to
another country, greater interdependence of various fiscal or regulatory policies and increased
dependence of national markets on the international trade. Because of the rapid development
of technologies, mobility of labour force, goods, services, finance and capital across the
world has become quite convenient and cost effective. Also, the level of communication in
the global world has improved significantly because of introduction of different means of
communication. Technological progress has also resulted in drastic decline in the cost of
communication of information from one country to another country (Gereffi, et. al., 2001).
All these factors have made it easy for the large companies to grow and expand the business
without considering their geographical limits.
Rise of Multinational corporations because of Globalisation

Financial And Economy Literacy for Managers 4
The multinational corporations of the countries help in nurturing the growth and prosperity
their respective economies by generating foreign exchange through the export of their
products and services. The foreign exchange that is generated by the MNCs of a country
enables it to enter into trade deals in the potential international market where payments are
required to made in the local currency of such countries (Ionescu, & Dumitru, 2011).
The economies of UK and US have been the strongest economies across the world but after
the recession even these economies had to face severe repercussions. Local corporations are
rapidly going global by the ways of setting up of plants in the overseas markets in order to
take advantage of the cost effective labour resources and to get closer to the markets where
the demand of their products is higher (Landefeld, 2003). It is generally observed in many
surveys that the labour cost of UK is comparatively higher than that of other companies. Due
to this, the UK firms that are engaged in the business of manufacturing of consumer products
or other goods under which high component of labour cost is involved are unable to compete
with other manufacturing concerns of other countries (Stearns, 2016).
Real world examples of companies that have adopted the concept of globalisation
 Most recently Apple Inc. has become a virtual firm which has outsourced its
significant portion of production work to the other counties such as Asia.
 Another example of multinational corporations is the case of Toyota Motor Corps.,
which is a Japanese company. Toyota is shipping is car parts manufactured in Japan
to US for their final assembly because of availability of high-class technology and
human intelligence factors in the US economy. Only around 1/3rd of the total
operations of the business are carried in japan and almost 2/3rd of the business
operations of Toyota cars are carried in different counties (Schifferes, 2007).

Financial And Economy Literacy for Managers 5
Conclusion
Globalisation has therefore allowed the companies to expand their business to the
international markets so that the customer base of those companies could be enhanced.
Besides this, it has become easy for the countries to take advantage of the technologies that
are developed by the different countries to enhance their productivity. The concept of
globalisation is that it has positively contributed to the strengthening of economies of
different countries through various modes.

Financial And Economy Literacy for Managers 6
Question 2
Introduction
Economic growth of the country means raising the income of the citizens of that particular
country and thereby reducing the problem of poverty in such countries. In order to instil the
growth in the economy UK government has designed various policies at the macroeconomic
level. To promote the economic growth, government is focused on increasing the aggregate
demand and supply. For this purpose it has formulated various demand policies and supply
side policies.
Demand Sided Policies:
Demand side policies are those policies that are designed with the intention of enhancing the
aggregate demand in the economy. It mainly covers fiscal policies and monetary policies. If
the corporations have ideal capacity, demand side policies can enable them to increase the
economic growth rate.
 Monetary policy
Monetary policies are one of the key tools to stabilize the country’s economy. To enhance the
overall demand in the market, governmental regulators or the banking institutions can cut
down the interest rates prevailing in the economy. Though, it is not possible that reduced
interest rates can always boost up the spending pattern of the country’s people. The UK’s
monetary policy is regulated by Bank of England. This bank has given the authority to set the
interest rates in the country. During the period 2009-2017, after the huge financial crisis of
2008, setting the lower rates in the economy was insufficient to reinstate the economic
growth in the economy hence Bank of England had to pursue the policy of quantitative easing

Financial And Economy Literacy for Managers 7
which involved enhanced money supply and buying of government bonds. In year 2009, the
base interest rates were cut down by the government to 0.5% with the motive of stimulating
the economic growth in the country. During the period of 2009-2012, after the financial
crisis, there was no immediate risk of house bubble and hence the policy of government to
keep the interest rates at the zero level proved to be appropriate.
 Fiscal policy
Fiscal policies are intended to increase the disposal income of the country. UK government
had initiated at expansionary fiscal policy for the country to compensate for the decline in the
spending of its private sector. Formulation and implementation of fiscal policies by the UK
government has boosted the demand of the products and services dealt in the UK market by
cutting down the tax rates and also by enhancing the government spending. In year 2009, the
UK government had introduced an expansionary fiscal policy in the country to respond to the
severe impacts of the economic recession when GDP of the country fell down to 6% and also
VAT rate was cut down from 20% to increase the customer spending in 2009 (Allen, 2016).
This ultimately caused increase in borrowing by 10% of GDP of the country. This was the
key driver of economic growth of UK. Also, the government of UK has targeted to cut down
the corporation tax rate below 15%. Government in UK realised that in 2010 that the deficit
is too high and hence they announced various plans to reduce the government borrowings.
The UK Government has also targeted to the inflation rate at 2% for the country’s consumer
price index (CPI) (Pettinger, 2017).

Financial And Economy Literacy for Managers 8
Figure 1: UK Net Borrowing -% of GDP
Source: < https://www.economicshelp.org/blog/113/uk-economy/monetary-and-fiscal-
policy-in-the-uk/>
Supply Side Policies:
 Infrastructural development
To attain the sustainable economic growth of the nation’s economy, UK regulators have
committed to invest around £ 100 billion towards the country’s infrastructural development at
the Spending Round 2013. The National Infrastructure Plan, 2014 had a clear vision for the
infrastructural development in UK. It included bring of delivery plans in the key sectors of
the economy by 2020. The intended sectors were transportation, energy, communications,
science and waste management. Government had also increased its spending in the science

Financial And Economy Literacy for Managers 9
and technological development projects by £ 1.40 billion above the overall amount that was
committed by them at Spending Review, 2010. The access to funds by the UK businesses has
also been enhanced by the government in last few years (UK Government, 2015).
 Cutting Corporation Tax:
Cutting down of corporate tax rates was also a major action by UK government to promote
economic growth from 28% to 23% in 2010 and thereafter, 20% in 2015. This has supported
the UK businesses to grow and invest more (UK Government, 2015).
Conclusion
Therefore, it can be said government played major role in reinstate the economic growth in
the country after the great recession event.

Financial And Economy Literacy for Managers 10
Question 3
Market Structures:
The structure of market depends upon the availability of number of sellers and buyers for the
products that are dealt in that particular market. Basically there are 4 types of market
structures. They are:
 Perfect Competition: It is that type of market where huge number of minor firms
competes with each other. Therefore, no single firm can significantly influence the
market. For example: Stock market.
 Imperfect Competition: In this type of markets also there is the presence of number
of small firms that are competing with other but all of them sell similar but little
differentiated products. For example: Market of cereals such as some firms deals in
Cap’n Crunch, some in Lucky Charms, some in Apple Jacks and so on. All these
brands tastes slightly different but are used as the breakfast purpose only.
 Oligopoly: These markets are dominated by little number of firms and hence there is
low competition. An example of oligopolistic market is the gaming consoles market
which is majorly dominated by 3 corporations: Microsoft, Sony, and Nintendo.
 Monopoly: This type of the market is unique in nature because of presence of only
single firm to control the whole market. The customers of these markets have
restricted choices and there is negligible competition in these markets. Example of
monopolistic firm is Microsoft Inc.
Concept of Demand in Market
The term demand is used to refer the quantum of goods and services that the consumers in the
market are willing and capable to buy at a given price. The demand of anything in the market
depends upon the needs and wants of a person. There is generally an inverse relationship

Financial And Economy Literacy for Managers 11
between the price and the demand of the goods and services. Almost every time, when the
price of a product increases, the demand of such product decreases (Bouchaud, Farmer, Lillo,
2008). Also, the decrease in price of the product leads to the increase in the demand. This
inverse relation is termed as law of demand by the economists.
Taking the example of a business under which gasoline is supplied. Whenever, the price per
gallon of gasoline increases, the people tends to look for the ways to lower their consumption
of gasoline product either by choosing the places for the shopping purpose, where they can
find maximum things needed by them under the same roof or by using the carpool or other
public conveyances or by reducing their vacation trips etc. Graphical representation of this
hypothetical case is shown below.
Price per gallon Quantity (gallons) Demanded (in millions)
£ 1.00 800
£ 1.20 700
£ 1.40 600
£ 1.60 550
£ 1.80 500
£ 2.00 460
£ 2.20 420

Financial And Economy Literacy for Managers 12
Figure 2: Demand Curve for Gasoline Product
Concept of Supply in Market
The term supply is used to refer the quantum of goods and services that the suppliers in the
market are willing to sell at a given price. There is a direct relationship between the price and
the supply of the goods and services. Almost every time, when the price of a product
increases, the suppliers are willing to sell more units because it offers them more profitability
and hence the supply increases in the market of that product or service (Delgado, 2003). Also,
the decrease in price of the product causes decrease in the supply of that product or service
because of the fact that suppliers are not willing to sell their goods or services at a lower price
since it is not profitable to them. The direct relation between the supply and price of goods or
services is termed as law of supply by the economists (Principles of Economies, 2018).
For example: Whenever the price of gasoline product increases, it encourages the firms that
are seeking high profitability to take-up certain actions such as expansion of oil exploration
for the oil reserves, enhanced drilling to extract more oil, more investment in the oil pipelines
as well as tankers that transports the gasoline product at the gas stations, building of new oil
refineries, opening up of gas stations for longer hours so that more and more customers could
be entertained.
Price per gallon Quantity (gallons) Supplied (in millions)
£ 1.00 500
£ 1.20 550
£ 1.40 600
£ 1.60 640
£ 1.80 680
£ 2.00 700

Financial And Economy Literacy for Managers 13
£ 2.20 720
Figure 3: Supply Curve for Gasoline Product

Financial And Economy Literacy for Managers 14
Question 4
Management Accounting Costs Concepts
Introduction
Management accounting is the process of collecting, recording, analysing and interpreting the
information that is used by the management of the entity to undertake informed decision
regarding the entity’s business. Cost accounting is the key process of management accounting
that involves determination of cost of the products and services produced by an entity. The
identification of true cost is necessary to set the prices of the products or services on the basis
of which they can be sold in the market. If correct pricing decisions are undertaken a firm
will not be able to achieve reasonable profitability from its business.
Use of costing concepts and budgeting techniques by managers
Various costing concepts are often used by the managers in the course of their business to
record and account for the data related to the significant transactions carried as a part of
business. The costing concepts help in classification and assignment of cost to the different
products and services on the appropriate basis using the advanced cost management
techniques and methods (Hansen, Mowen & Guan, 2007). At times companies are typically
involved in the production of homogeneous products, it is difficult for them to trace out the
true cost of each of their product. For example, a firm is involved in manufacturing of paints,
bricks and lumbers used in the building construction. Since such products are manufactured
in the continuous processes under which cost is pooled together and the final output is
measured in the total quantities. Under such circumstances it is hard to attach specific costs to
each bucket of paint or a stack of bricks or a piece of lumber produced by the managers.

Financial And Economy Literacy for Managers 15
Also, there are certain organisations that need proper understanding of cost involved in their
functions to provide the core services of the business in order to undertake proper billings for
their clients. Taking an example of an architectural firm that is involved in the business of
designing home. The activities that are involved in its business are complex in nature. Due to
the fact that an architecture has to take up multiple projects in a day and such projects involve
multiple activities such as training staff, developing clients, billing and collections, designing
and printing plans, visiting job sites and consultation of problems encountered during the
construction process, it gets difficult for the firm to identify how much exact cost is incurred
to set a blueprint for a particular client. In such cases application of relevant costing concept
helps the managers to determine the accurate cost associated with their services. The two
major concepts of costing are: absorption costing and direct costing (Drury, 2013). Under
absorption costing, full cost including the amounts that are not easily identifiable to a
particular product, is assigned. But managers must understand that excessive reliance on the
absorption costing concepts can lead them to the bad decisions. Therefore, they must apply
direct costing concepts where only direct cost of production is applied to the output unit
(Zimmerman & Yahya-Zade, 2011).
Further, management accounting can be used to undertake proper planning of the business
using the budgeting and forecasting techniques. Budgeting is an integral part of business
planning process as it involves preparation of budgets regarding important aspects of the
business for the prescribed period. Budgets are those statements covers the estimated incomes
and costs involved in certain transactions in which context budgeting is undertaken.
Therefore, a cost management has to prepare different types of budgets such as production
budget, purchase budget, sales budget, cash budget and so on (Inman, 2014). Budgeting
process is usually carried before the commencement of period to which such budgets are

Financial And Economy Literacy for Managers 16
related so that it can enable the managers to undertake the transactions in accordance with the
plans so that effective utilisation of resources can be made to achieve the desired results.
Conclusion
Thus, it can be said that the application of requisite management accounting cost concepts
and budgeting approaches can enable the managers of the business to undertake effective
decision-making.

Financial And Economy Literacy for Managers 17
Question 5
Part a) Amortisation Schedule
Loan Amount £ 50,000.00
Rate of interest 7%
Loan Term 3 years
Year 1 0.935
Year 2 0.873
Year 3 0.816
Cumulative
discounting factor 2.624
Loan Amount=
Instalment amount * PVAF @
7%
Instalment amount £ 50,000.00
2.624
Instalment per
year £ 19,052.58
Loan Amortisation
Table
Yea
r
Opening
Balance
Instalment
Amount
Interest
Amount
Principle
Amount
Closing
Balance
1
£
50,000.00
£
19,052.58
£
3,500.00
£
15,552.58
£
34,447.42
2
£
34,447.42
£
19,052.58
£
2,411.32
£
16,641.26
£
17,806.15
3
£
17,806.15
£
19,052.58
£
1,246.43
£
17,806.15
£
-
Part b) Present value of required deposit calculation
year
DCF @
7% p.a. Amount to be received PV of amount to be received
1 0.935 £ 900.00 £ 841.12
2 0.873 £ 900.00 £ 786.09
3 0.816 £ 900.00 £ 734.67
Lump sum
amount of
deposit £ 2,361.88

Financial And Economy Literacy for Managers 18
Part c) Evaluation of alternative projects
PROJEC
T A
Years Cash Flows
DCF@
6.45% PV of Cash Flows
0 -£ 50,000.00 1.000
-£
50,000.00
1 £ 17,000.00 0.939
£
15,969.94
2 £ 8,000.00 0.882
£
7,059.90
3 £ 19,000.00 0.829
£
15,751.31
4 £ 16,000.00 0.779
£
12,460.55
5 £ 15,000.00 0.732
£
10,973.95
NPV
£
12,215.65
PROJEC
T B
Years Cash Flows
DCF@
6.45% PV of Cash Flows
0 -£ 50,000.00 1.000
-£
50,000.00
1 £ - 0.939
£
-
2 £ - 0.882
£
-
3 £ - 0.829
£
-
4 £ - 0.779
£
-
5 £ 95,500.00 0.732
£
69,867.47
NPV
£
19,867.47
Decision: NPV of Project B is higher than that of Project A. Hence Project B must be
selected.

Financial And Economy Literacy for Managers 19
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Financial And Economy Literacy for Managers 21
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