Business and the Economy: Causes and Effects of Economic Changes

This report delves into the intricate relationship between business and the economy, examining the causes of economic growth, inflation, and unemployment. It explores how these macroeconomic factors impact businesses, particularly focusing on Nestle UK. The report analyzes the drivers of economic growth, including shifts in aggregate demand and supply, and discusses various types of inflation, such as demand-pull and cost-push inflation, and their effects. It also examines the causes of unemployment, including frictional, structural, and cyclical unemployment. Furthermore, the report assesses Nestle's responses to changes in economic growth, the effects of inflation on the company, and its strategies for dealing with these challenges, including the impact of Brexit. The report uses sources to support the analysis of economic changes and their effects on business.

BUSINESS AND
THE ECONOMY

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................3
TASK 1............................................................................................................................................3
1.1 Possible causes for economic growth, inflation and unemployment...............................3
TASK 2............................................................................................................................................7
2.1 Assessment of various responses of Nestle to changes in economic growth...................7
2.2 Effects of inflation and assessment of strategies of Nestle to deal with them.................8
2.3 Assessment of effects of unemployment on Nestle..........................................................9
CONCLUSION..............................................................................................................................10
REFERENCES..............................................................................................................................12

INTRODUCTION
Business and economy are parallel to each other, the challenges faced by corporations in
given economy are the financial issues of business economics. Business and economy looks into
a new world where a new generation of brands and originators are reshaping the market. In
addition to this, they are grasping the opportunities of change. Business and economy are
combination of VUCA (volatility, uncertainty, complexity and ambiguity). Significance of
business in economy is trading of valuable things such as good, service, information or money
between two parties. This report has been made with the purpose of discovering the causes of
economic growth, inflation or unemployment. It also covers the areas of responses of different
firms upon different changes in the economic-growth. Inflation has negative consequences on the
businesses in the given economy. Unemployment is also a major issue which has resulted in
lower growth in the economy of United-Kingdom. Nestle UK has been a leading Nutrition,
Health and Wellness company globally. Headquartered in United-Kingdom, CEO Fiona
Kendrick (Oct 2012 to present), the company was founded in 1866.
TASK 1
1.1 Possible causes for economic growth, inflation and unemployment.
a) Economic Growth: It is increase in Real Gross Domestic (GDP) Product of the country.
Economic growth is increase in National income and National Output in the Nation (Cloyne and
Hürtgen, 2016).
Mainly it is caused by- Increase in aggregate demand or collective supply.
Causes for increase in demand are due to shift in AD curve, which reflects increase in exchange
rates, falling which net exports reduces with increase in aggregate expenditure.
Aggregate Demand Curve: AD curve represents total demand of goods and services that willing
purchase by the customer's in the given economy. That change in relationship of aggregate
demand with aggregate supply is called “shift”.
(Source: <http://www.economicshelp.org/macroeconomics/economic-growth/causes-economic-
growth/>.)
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Standard AD formula is = (expenditures on goods and services by consumers) +
(investment spending on business capital goods) + (government spending on public goods and
services) + (exports – imports). Changes in value of these variables changes the aggregate
demand. Right shift in AD curve is typically viewed as negative growth. While the left shift is
decline in total consumer spending. Reasons for such decline are there might be increase in
governmental taxes or higher cost of living.
Increase consumer spending shifts AD curve to right. Declining marginal propensity
(MPS) could be the reason for rightward shift. Increased both of the policies such as monetary
and fiscal policy might increase the collective demand.
Aggregate Supply Curve: AS curve depicts that how much output is supplied by firms in the
economy. In short run the reasons for shift in AS curve are the increase in wages or physical
stock or improvement in technology. GDP increases when price level decreases resulting in shift
in AS curve. Increased resources would result in higher production of goods and services.
In the long term cause of shift in curve is economic growth i.e. increase in productive
resources like labour, technology and capital. At this point everything is expected to be optimal
and the curve is seen as static because it shifts at the lowest speed. The long run curve is vertical
as per belief of some economists, that variation in aggregate demand is only impacts total output
temporarily (Cashin and et.al., 2014). Right shift of AS curve is the result of rise in population,
physical capital stock or technological progress.
Other Reasons for growth:
 Increased capital ex. Investment in new factories or infrastructure such as roads or
telephones.
 Rise in population through immigration, high birth rate or low death rate.
 Increase in labour productivity because of finer education and developed technology
(Martin and et.al., 2016).
 Discovering new raw materials or technological advancement for improving labour and
capital productivity.
(Source: <https://www.boundless.com/economics/textbooks/boundless-economics-
textbook/introducing-supply-and-demand-3/supply-47/changes-in-supply-and-shifts-in-the-
supply-curve-178-12276/> )
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Above also determine shift in supply affects the equilibrium point, and could be caused
by variation in consumer choices or new technological development and improvement.
b) Inflation: When there is sustainable increase in price level the situation is Inflation. Put
simply, increase in value of goods and fall in value of currency. This causes due to excess
aggregate demand or cost push factors.
Demand pull Inflation occurs when high prices are quoted for goods and services in the
economy. It is said to have been declared when aggregate demand in the given economy exceeds
aggregate supply and this inflation is difficult to stop. When economy is close to full
employment, it causes the AD curve shift to right, leading to increase in price levels. Also, when
economic growth is above long-long-term trend rate of growth, demand also pull rising prices
occurs.-Long-term trend rate of economic growth is growth in productivity. It is described as too
many dollars chasing too few goods or services (Dhingra and et.al., 2016). Other reasons for
demand pull inflation are emergent rise in exports which than result in under-evaluation of
involved currencies; rise in governing spending; forecasts and expectation of rising prices; where
industrialists increase there prices to cope up with the environmental changes. Monetary growth
(money growth) is another reason for demand-pull inflation.
Cost pull inflation: If there is increase in costs of firms, this burden would be passed to
consumers and there would leftward shift in aggregate supply. Drivers of Cost-pull inflation are
Rising wages or Import Prices or Raw material prices or declining productivity etc. Rise in
wages are caused due to bargain by trade unions for higher wages. This is the some cause of
cost-pull rising being the most important costs for the organizations. One third of all goods are
imported in United Kingdom, inflation occurs when import prices become expensive i.e. if there
is devaluation. Devaluation is worth less pound, thus firms have to pay high for purchasing
goods.
If the price of some most consumable goods increases it would lead to increase in prices
of related goods. For instance increase in price of oil, results in increase of most of related goods
and further causing inflation.
c) Unemployment: There are mainly four causes of unemployment including demand
inadequate, functional, frictional, voluntary and real wage unemployment. Frictional
unemployment occurs when people take time to transfers the job, ex. graduates or people
shifting jobs. There is always some frictional unemployment in given economy because its take
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time to find out. Also, called transitional unemployment, ex: when new entrants enter to labour
market (Ruhs and Vargas-Silva, 2014). There are thousands of job opportunities in UK, so this
kind of unemployment is unavoidable and desirable too, such that job vacancies can be filled.
Another reason is structural unemployment, it is mismatch in skills of workforce in the
economy. Occupational, geographical, technological or structural change in economy. Some
times immobilities refers to difficulties in learning new skills required for new industry.
Geographic immobilities are difficulties in moving from one region to another (Greenglass and
et.al., 2014). Technological change the development of labour saving technology, due to which
there is fall in demand of workforce. Decline in any sector due to lack of competitiveness, but
expertise in sector would not let the workers find job in another sector.
Actual wage unemployment :- Occurs when wages in this competitive markets are
pushing above the equilibrium. In the given figure W2 is the supply workers, (Q3) demand is
higher than its (Q2). Trade unions and minimum wages can push the wages to disequilibrium.
Demand inadequate or cyclic unemployment is happened when company is below full in the
capacity.
For instance in recession, aggregate demand falls, leading to fall in output and negative
economic growth. Due to fall in output firms employ fewer workers because of fallen
productivity. In recession, unemployment results in laying off by workers rapidly.
Voluntary unemployment occurs when people choose to remain unemployed rather than taking
the jobs available. If the advantages are generous, people rather refer to stay on benefits than
working. Frictional unemployment is also a type of Voluntary unemployment.
Unemployment in UK has fallen from 4.9 to 4.5 in July 2016 to April 2017.
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(Source: <https://tradingeconomics.com/United-Kingdom/unemployment-
rate>)
TASK 2
2.1 Assessment of various responses of Nestle to changes in economic growth.
Growth will be slow, clearly significant in year of the 2017, social unit incomes will be
compressed by higher rising and businesses will be hold back on decisions of investment because
of uncertainness about Brexit, according to economists in an annual Financial Times survey
(Economists gloomy on UK prospects for 2017). UK is cerebration of have been the faster
growing economy in the year of 2016. Most of the economists are expecting slower growth in
UK, from about 2.14 percent in 2016 to 1.50 percent in 2017.
Devaluation in Greatest is foreseen to lead to higher inflation rates, while wages are
expectable to rise very slow. Anticipations are rise in businesses trying to restrain costs after
looking forward to future economy in United-Kingdom. These pressures will be hold back
spending of consumer, their involvement in the economy growth.
One of the economists responded, 45 percent expected marked lesser growth in 2017 to
somewhere between 1.10 to 1.50 percent. Further, 19 percent more expected slow-down in UK.
Only 3 percent rise is expected in 2017 from previous year (2016), or fractionally slower. “UK
economic growth will be super-rides on the upside in 2017,” this statement said by Marian Bell,
former member of Bank of England’s Monetary Policy Committee.
However, there are n number of factors, likely to be reason for growth this year. Some
factors will provide greater stimulus than in 2016. The destructive outcome of increased price on
expendable income is such as power full and positive impact of fewer values of sterling (Pessoa
and Van Reenen, 2014). Few economists pointed out considerable volatility in the exchange
rates, or problems been created for exporters.
It has been viewed by few researchers that global economic environment is the most
uncertain in modern history at present. This uncertainty is so large that not too unlikely and
perfectly possible the growth would speed up in 2017. While few uncertainties are global, there
is specific uncertainty about the outlook in China, Continental Europe and USA.
Risks in Europe includes political uncertainty on upcoming French and German elections,
due to continuous higher migration and instability in Italian Banking Sector. Domestic risks will
focus on uncertainty about how the Economists' negotiations will progress. But there is risk in
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potential for predicting the labour productivity in UK, consistently disappointing since past few
years and for further strike action.
'Household consumption would be weaken' as per one of the economists said. Reasons
are decreasing disposable income and weaker credit growth. Fiscal policy will provide only a
humble motivation, global growth looks now strong (McCombie and Thirlwall, 2016).
Despite current resilience, 2017 is foreseen to be difficult for the economy of United-
Kingdom. Indeed, it has been expected that GDP would grow very slow by 1.3 percent from an
estimated 2.1 percent in 2016 (Economists gloomy on UK prospects for 2017). It is clearly
significant that consumers will face diminishing purchasing power in current year.
2.2 Effects of inflation and assessment of strategies of Nestle to deal with them.
UK economy cooled substantially in the first quarter of the year as higher rising has put
squeezing on expendable income. But City economists are prediction a tough of year ahead as
discussed in above question. Inflation affected economy by a sharp slow down in growth to 0.4
percent in the quarter one (January to March). This was the lowest performance after March
2016, when the growth in economy was 0.2 percent.
The common effects of inflation are: Erodes Purchasing Power, inflation is fall in
purchasing power of currency due to price rise of goods. Within living the memory of one cup
coffee cost a deck. Such as price alteration could conceivably have resulted from upsurge in
coffee or price syndicate by cartel of manufacturer of coffee. Long time of devastating
dryness/floods/conflicts in major coffee cultivating regions. Goods of Nestle are not possible to
substitute and are non-discretionary many item of eating such as oil, food, they can affect the
economic growth by themselves. Therefore, many economisers say that food and fuel are less
volatile.
Encouraging Spending and Investing: A foreseeable result to falling buying power is to
spend now, instead than future. Though, currency is going to lose its value, its amended to stock
up on the things that are not expected to lose their value. Consumers are suggested to fill up gas
tanks, cushioning the freezer i.e. filling up with the food items that can be stored for long (Ayres
and Voudouris, 2014). While businessman is recommended for making capital investments in
different conditions. Many of the Investors buying gold and different valuable metal during
rising prices and when it takes a hold their container cancels out the advantages of their insulant
due to price rise, especially in short term.
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Causes more Inflation: Unfortunately, the motivation to spend more, tends to boost
Inflation in result. To save time people and businessman spend more they are holding their
devalued currency, economy find out on itself overflowing in payment that no one specially
wants. In other words, the excess supplying of money moves ahead the demand. The price of
currency falls at an even higher rate.
If it not likely that when economy will recover a reasonable inclination, to keep all the
businesses and other business runners who is helps growth of economy and improvement in
currency rates, such as the day-to-day pays turns into spending on just anything that it does not
become worthless money.
Raises the Cost of Borrowing: To manage inflation the best approach can be using
monetary policy. To achieve that, central banks believe on relationship between interest rate and
inflation. Increase in interest rate would lead the businessman or individuals to borrow cheaply
to commence new businesses earn a new point, hire new employees or buying a new shiny boat.
Generally, these measures stoke inflation in turn.
Increasing the interest rates can put a damper on violently disordered animal spirits.
Better to deposited some money into bank, so that it will fetch interest. When there is no much
splashing in immediate payment, becomes more insufficient (Cloyne and Hürtgen, 2016). This
scarcity increases its value in monetary terms, though bank do not require more money literally
to become more valuable. They fear inflation as much as they fear hyperinflation. Rather, they
pull interest rates in order to maintain inflation.
2.3 Assessment of effects of unemployment on Nestle.
UK's market reflects signs of slowing, as the number of people in work declined and
wage growth has fallen for the first time. Thus, resulting in falling steam in European Union
Vote.
The unemployment rate increased to 74.4 percent in the 3rd quarter of 2016, from the
record of 74.5 percent. As per the report of the National Statistics (ONS), It was the first drop
since February to April 2015, initiation by 6,000 declines of people working to 31.76 million.
Meantime the count of claiming unemployment merits significance rose by 2,400 in the
November to number of 80,9000. This was the first-time disappointing noticed since Brexit vote.
An employment expert said., public sector jobs rise was does not to outset. Also, private sector
affected from the Brexit. The UK market finally seems to be miserable, present time te
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requirements hitting in the Labour sector appears to have entered and somewhat entered at
slower time.
The report of UK employment was enclosed with unemployment down from 16000 over
the quarter to 1.62 million are the jobless rates remained unchanged at 4.8 percent. Average
group pay a more expected to 2.6 percent or 2.5 percent excluding bonuses.
Many of the economists highlighted the unemployed rates facts at the lowest points. He
added this year making remembered as many records. Employment has been continuously
moving at all the time with women employee, older employee and traditional minority groups of
workers. While the employment rate is stiffs high. It is somewhat the down on the records set
present time.
Nestle has launched a partnership with My kinda future, shows that not only youth are
gaining working experience benefits but also helps build confidence for future. Nestle partnered
with My kinda future in November 2013, as a part of Nestle needs youth initiative. With the aim
of providing employment training to youth and develop their understanding upon opportunities
in STEM (Science, technology, engineering and maths) within the manufacturing and
consumables sector.
This partnership has been able to support 4,557 students personally via workshop,
assessment days and work experience, exceeding the target of 4000. This engagement gave
outcome in 94.5 percent of students participating and having knowledge of Nestle Academy.
This partnership resulted for Nestle to overcome the unemployment in the economy and gave a
competitive edge over the rival firms. Unemployment didn't affect the economic situation of
Nestle in much broader way.
CONCLUSION
With this report, the efforts are being made to reflect the relationship between the
business and the economy. The possible causes of economic growth are increase in aggregate
demand or aggregate supply. Change in the relationship of aggregate demand and aggregate
supply is the shift. Increased capital investment; rise in population; increase in labour
productivity and discovering new raw materials or technological advancement are other reasons
for growth. Inflation and unemployment are factors that deeply affect the economy. There are
two types of inflations demand-pull inflation and cost-pull inflation. Unemployment are broadly
discussed in five cases demand inadequate, functional, frictional, voluntary and actual wage
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unemployment. Further, various responses of different firms are assessed in respect to economic-
growth. Along with effects of inflation and assessment of strategies to deal with them are broadly
explained. Managing the business is crucial to survive in economy, the state of inflation,
unemployment are major causes that affect the economy and business.
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REFERENCES
Books and Journals.
Cloyne, J. and Hürtgen, P., 2016. The macroeconomic effects of monetary policy: a new measure
for the United Kingdom. American Economic Journal: Macroeconomics. 8(4). pp.75-102.
Cashin, P. and et.al., 2014. The differential effects of oil demand and supply shocks on the global
economy. Energy Economics. 44. pp.113-134.
Martin, R. and et.al., 2016. Spatially Rebalancing the UK Economy: Towards a New Policy
Model?. Regional Studies. 50(2). pp.342-357.
Dhingra, S. and et.al., 2016. The impact of Brexit on foreign investment in the UK. BREXIT
2016. p.24.
Ruhs, M. and Vargas-Silva, C., 2014. The labour market effects of immigration. Migration
Observatory Briefing. University of Oxford.
Greenglass, E. and et.al., 2014. The financial crisis and its effects: Perspectives from economics
and psychology. Journal of Behavioral and Experimental Economics. 50. pp.10-12.
Pessoa, J. P. and Van Reenen, J., 2014. The UK productivity and jobs puzzle: does the answer lie
in wage flexibility?. The Economic Journal. 124(576). pp.433-452.
McCombie, J. and Thirlwall, A. P., 2016. Economic growth and the balance-of-payments
constraint. Springer.
Ayres, R. and Voudouris, V., 2014. The economic growth enigma: Capital, labour and useful
energy?. Energy Policy. 64. pp.16-28.
Online.
Causes of unemployment. 2017. [Online]. Available through:
<http://www.economicshelp.org/macroeconomics/unemployment/causes/>. [Accessed on
22 June 2017].
Economists gloomy on UK prospects for 2017. 2017. [Online]. Available through:
<https://www.ft.com/content/a0c3fce4-d0e2-11e6-b06b-680c49b4b4c0?mhq5j=e1>
[Accessed on 22 June 2017].
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