Effects of Economic Growth, Inflation, and Unemployment on Firms

This report explores the intricate relationship between economic growth, inflation, and unemployment, highlighting their significant impact on businesses. It delves into the causes of economic growth, inflation, and unemployment, emphasizing how these factors are interdependent and influence each other. The report analyzes how changes in the economy, such as controlled inflation or recession, can affect business operations, using examples like Burberry and Adidas to illustrate firm responses to economic shifts. It further discusses the effects of inflation on firms, including consumer purchasing power and inventory costs, and assesses strategies like Just-in-Time inventory management. Finally, the report examines the impact of increased unemployment on firms, such as weakened consumer buying power, and underscores how both economic growth and instability can significantly shape business strategies and outcomes. Desklib provides a platform to access similar solved assignments and study resources.

Business and Economy

Table of Contents
Introduction................................................................................................................................1
1. Understand the main cause of economic growth, inflation and unemployment.................2
2. Understand the effects that changes in the economy may have on business......................5
Conclusion..................................................................................................................................7
Reference....................................................................................................................................8

Introduction
A prosperous economy brings immense development in a country. Economic prosperity is
essential for achieving even fiscal movement in a country. A prosperous economy is not just
a state where growth has reached its greatest height, but it is a state where various economic
sectors are diligently balance, income is evenly distributed and has a peaceful environment in
the markets. Specialization of trade is considered to be the key to attain a successful
economic growth in a country. However, there are hindrances, which pull down the economy
of a nation. Unemployment and inflation are two such obstacles in the way of achieving a
prosperous economy. Unemployment is universally recognised as deterioration to an
economy. Academics and economists are of the opinion that elevation of unemployment has
been imposing significant cost issues on the individuals of a country and also on the country
and the society. It demoralizes the youth of the nation and also contributes in poverty of a
certain section in a nation. Inflation on the other hand makes the population of a country lose
their savings and reach a state of depression. It affects the standard of lifestyle of the people
of the nation. With millions of people suffering a cut in their wages, it also pulls down the
fiscal development of the country. In this report, the economic growth of the country and the
drawbacks of unemployment and inflation will be discussed.

1. Understand the main cause of economic growth, inflation and unemployment.
There exist an inverse between the three subjects, namely, economic growth, unemployment
and inflation. These three variables of an economy are interdependent and therefore the rate
of success of growth in an economy cannot be measured by considering just one of these
factors in isolation. In the context of a long run in an economy, the faster it grows; the people
have better access to materialistic wealth. Conversely, the rate of growth in an economy
consequently affects the other factors in it. If the growth that persists is too rapid in rate in the
functioning of fiscal movements, a risk of upcoming inflation may accelerate. If the
economic growth is too slow in a country, then the risk of emerging unemployment may
arise. Even though, the rise in unemployment is generally associated with economic
recessions and contractions, it is potentially possible for an economy to grow in a moderate
rate, so that it does not hit inflation in its early stage and produces greater opportunity for
employments throughout the country. As it is known by all, boom in an economy, hitting
inflation and its fall to recession is a periodic cycle, which cannot be easily changed. The
economically beneficial alternative of a prosperous economy is to maintain the a healthy flow
of fiscal balance for a longer period of time, that would contribute a healthy growth of the
economy to a nation.
1.1. Discuss two possible causes of
a) Economic growth
The most powerful instrument for reducing poverty and implementing a healthy fiscal
movement across a nation is economic growth. (GROWTH,2018). Although there is
no unanimous definition of economic growth, theoreticians are of the opinion that
economic growth is a process, which generates social and economic, quantitative and
qualitative alterations. These changes cause the economy of a nation to durably and
cumulatively increase the real national product that automatically brings opulence in a
country (THE CONCEPT OF ECONOMIC GROWTH, 2018). The capacity of an
economy to manufacture and produce goods and services, or growing productivity of
a nation is referred to as economic growth. It can be marked by the increase in GDP
of a nation.
Two possible reasons that cause economic growth are as follows:
1. Increase in the aggregate demand of an economy
2. Increase in productive capacity of aggregate supply of an economy

The former cause of economic growth is influenced by various factors such as lower interest
rates and an increase in the wages of people (Causes of economic growth, 2018). The decline
in interest rates reduces cost borrowings which encourage the consumers to spend on
commodities and the firms to invest on productivity. Increase in wages also increases the rate
of disposable income which influences the consumer’s spending. Increase in government
spending on infrastructure also generates disposable incomes of the consumers influencing
them to spend on commodities and services. Devaluation also plays a role in affecting the
aggregated demand by making imports more expensive and domestic goods more attractive
and valuable to the consumers.
The later cause of economic growth is influenced by factors, such as increased capital, for
example investment in factories or infrastructure of the country and increase in working
population of a country. Many economists are of the opinion that human labour is the pillar
of an economy. Increase in the quality of production by cultivating them with the
incorporation of advanced technology also contributes in an increased aggregate supply.
b) Inflation
A general broad measure, signifying the overall increase in price structure or an extensive
increase in the lifestyle essentials of a country is known to be the state of inflation. In simpler
words, it is the rate of increase in the prices of various commodities and services, over a
certain period of time (What Is Inflation, 2018).
Lax monetary policy causes high inflation in long lasting episodes. When the supply of
money in an economy grows too big in relation to the size of the economy, the currency’s
unit value diminishes in a drastic manner. It can be said that, the purchasing power declines
and the prices of products and services radically increase. This relationship between the size
of an economy and supply of money is known as the quantity theory of money, which plays
an essential role in the rise of inflation in an economy.
The second cause of inflation is the pressure on the demand or supply side of an economy.
Supply shocks, which disrupt the productivity of an economy, such as raise in production
cause, natural calamity, rise in oil prices, can widely reduce the overall supply a cost push in
the country, commonly known as inflation. In this the impetus for hike in price generates
from disruption of supply. Similarly, demand shocks such as expansionary policies, stock

market rallies, boost overall demand in an economy. This increase in demand surpasses the
production capacity of an economy, resulting in strain of supply resources that creates
demand pull, leading into inflation in a nation.
c) Unemployment
Unemployment is a state of despair, where a person is willing to work but is unable to find a
suitable or a qualified job. The ratio of unemployment represents the percentage of
population capable of forming a labour force, without a job and who have actively been
looking for a job, within a certain period of time (UNEMPLOYMENT: ITS CAUSES AND
THEIR REMEDIES, 2018). It creates hindrances of discouraged workers, who later turn into
marginally attached workers. The two major causes of unemployment are as follows:
1. Jobs in recent times have become increasingly specialized- Companies provide its
employees with numerous benefits and facilities. This is because companies look
for employees with large number of specifications and not every labour can fulfil
these expectations of a company. Without meeting this requirement, a person
cannot even consider applying for such specific jobs. This is a big reason leading
to an increasing unemployment in an economy.
2. The concern of mobility in workforce- Mobility of labour force is one of the major
reasons contributing to unemployment. Many of the places, which are supposed to
provide employment, are just not efficiently developed to offer jobs to a large
number of people. Hence, people do not even want to move from one place to
other. Relocation is important to achieve employment in a certain different
location.

2. Understand the effects that changes in the economy may have on business.
Change in economy severely affects a business organisation. Regardless of a market value, a
business operates on economy of the nation. Economy underpins every action of a business
and procedure of operation (Galí et al., 2015) While a controlled inflation may proper a
company’s business, recession on the other hand may take a toll on all its operations.
However, every change must be handled with an eye for recession. If not so, the ailing
economy can destabilize the rade conducts of a company.
2.1 Analyze using two examples, how firms may respond to changes in economic
growth.
Burberry
In general sense, scarcity and luxury go hand-in-hand. When the supply of goods goes
substantially below the consumer demand for certain products, it is said to enter a situation of
recession. The luxury fashion brand of Burberry, has been taking direct responses to the
speed- to- market that the present use of internet has provided along with its accessibility.
Initially the luxury brand manufactured a limited stock of items that would only be purchased
by few wealthy people. But now the brand has commercialized itself and with the
promotional help of social media, it is receiving great demand from the market. Now,
consumers have a direct impact on the brand’s position and consequently its scarcity. It has
therefore decided to stick to the approach of limited edition commodities which will both
maintain the brand’s demand and tackle recession on a whole (Mumbrella Asia, 2018).
Adidas
It was reported that the sportswear firm’s profit in January to March fell 97% after the
company’s sales was hit by economic downturn in 2009. The company made 5 million Euros
in the first quarter of 2009, which was significantly brought down by the economic change.
The sales had already gone down on the previous year, and Adidas reported that it faced a
much higher wage and raw material cost for production of its commodities. To tackle this
situation, the renowned brand closed some of its offices and shut down few of its stores
across the world. It helped the company to undertake the crisis in a relatively easier manner.
By undertaking this action, the company approximately saved 100 million Euros in a year. It
reacted to this situation, by urgently restructuring its business operations (News.bbc.co.uk,
2018).

2.2 Discuss two effects that inflation may have on firms and assess the strategies they
may use to deal with them.
Effects of inflation range widely, impacting not just consumers but also the business
organisations.
Consumer purchasing- This heavily impacts the business of an organisation. The rapid rises
in prices keep the consumers away at bay, negatively impacting the business of a firm. It
reduce the chance of such revenue loss, the business organisation must gradually increase its
prices right when it assumes the heat of inflation, rather than striking its prices high all of a
sudden (Avery et al., 2015).
Inventory costs- Rapid hike in process not just impacts the price that the consumers pay, but
it also affects the cost businesses need to pay for inventory and materials. When the
replacement materials and inventory costs more than the ones which have just been sold, it
leads to shortages in the inventories of a business organisation. To tackle this situation, Just
in Time inventory management system is adopted by the companies. It helps the companies
save its inventories to be used in the times of crisis.
2.3 Assess two effects on increased unemployment on a firm.
Unemployment not just affects the lives of people who are not established as a workforce in
an organisation, but it also affects the organisation itself. Two effects on increased
unemployment on a firm are mentioned hereunder,
Weakens Consumer Buying- When people are out of work, they less money to spend on
purchasing products and services. An increased unemployment weakens the purchasing
power of the consumers in a market. As consumer themselves are the driver of the economy,
their loss of purchasing power directly sums to the loss of productivity and sales on a firm.
Layoff Penalties- Firms that go through multiple lay off, enable themselves in paying higher
amount of UI taxes. Even though tax rates vary from one state to another, employer or firms
who rarely or rather never lay off enjoy lesser payment of their total payroll in the form of
taxes. It can jeopardise the stability of a firm when a sizeable number of its former staff file
UI benefit claims (Agarwal et al., 2017).

Conclusion
To conclude, it can be said that economic stability is of utmost importance for peace and
prosperity in a society. It can be attained by diligently and skilfully tackling the hindrances
mentioned above. Public awareness on economic backdrops will help the principle market
actors, such as producers and consumers be more prepared to face economical disasters and
efficiently handle them when the time comes.

Reference
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Avery, D.R., McKay, P.F., Volpone, S.D. and Malka, A., 2015. Are companies beholden to
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https://www.economicshelp.org/macroeconomics/economic-growth/causes-economic-
growth/ [Accessed 5 Apr. 2018].
Galí, J., 2015. Monetary policy, inflation, and the business cycle: an introduction to the new
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UNEMPLOYMENT: ITS CAUSES AND THEIR REMEDIES (2018). [online] Tara.tcd.ie.
Available at: http://www.tara.tcd.ie/bitstream/handle/2262/4359/jssisiVolXiv229_238.pdf?
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