ASSIGNMENT 1
Question 1
Describe the business environment in the city or town that you live in. You should explain what the current economic environment is and how this environment encourages or inhibits business activity. Don’t simply say the environment is good or bad. You must justify your view and give examples to support your answer.
In answering this question, you should also examine the level and nature of competition in at least five different types of product markets. You should explain the type of market structure that exists in each of these product markets. You should clearly explain whether firms mainly engage in price or non-price competition and whether there is much or little competition and why? Based on your answers above, discuss the effects that the above business environment has on consumers and society in general.
(40 marks)
By NELSON TAWANDA CHUMA
MBA (Management), University of Nicosia Online
Introduction
Francistown is the second largest city in Botswana, a country located in Southern Africa. According to the January 2014 statistics, the city claims about 75 618 of the estimated country’s population of 2 million. It is located in the northern part of the country, 90km from the border with Zimbabwe.
The environment in Francistown is not favorable for business as it inhibits growth and general economic activity. There are some factors that encourage business activity and other factors that negatively impact on business. These factors are
Demographic factors
Macroeconomic environment
Political environment
legal environment or legislation
Microeconomic environment
Demographic factors
The population of Francistown is very small, which implies that all businesses around the city have a very small market base. There is a lower demand for products as compared to densely populated cities like Harare in Zimbabwe which has a population of about 2 million people. A small population is not favorable for business.
Macroeconomic environment
The macroeconomic environment in Botswana is generally conducive for business. The currency (Botswana Pula) is strong and stable. As of 11 March 2014 it trades at P8.82 to 1 USD, according to www.exchange-rates.org , retrieved on 9/3/2014. If the US dollar strengthens, local firms that purchase inputs from other countries are able to be more competitive in pricing.
The inflation rate of Botswana also reached an all time low value of 4.4% in November 2013, according to the government’s central statistical office www.cso.org.bw, retrieved on 7/3/2014. A low inflation rate is key to macroeconomic stability, and vital in creating an environment conducive for business.
The government offers grants to local investors and foreign investors who partner with citizens, as long as their proposals have undergone an extensive feasibility study that forecasts viability. Banks lend money at satisfactory interest rates, and they may even lend money to non-resident controlled companies without specific approval from the central bank. Businesses thus have an opportunity to expand and increase their output.
According to www.state.gov, retrieved on 8/3/14, Botswana is ranked number 1 in Africa on Transparency International’s anti corruption index. It is a stable country with the highest economic growth rate in the world. The overall economic health is good so consumers do not limit their expenditure to essentials. The demand pattern for goods does not fluctuate due to economic reasons, so it is easier for firms to make accurate predictions and adjust their production accordingly.
Political environment
Botswana is a democratic country with no history of political unrest since it gained its independence in 1966. This means there is stability in the management of public affairs and in trade.
Legal Environment / Legislation
The legal environment is not so favorable to firms. The processes to acquire different licences and permits, though cheap, are tedious and long. Some licenses are reserved for locals and that negatively impact on foreign owned firms that wish to expand. There is a severely constricted local worker skill base but immigration laws are very strict. Many firms that rely on expatriate managerial and technical expertise find immigration as a major constraint.
The part of legislation which encourages business growth is the right to private ownership. The constitution prohibits the nationalization of private property and apart from business sectors reserved for locals; the country has no restrictions on private ownership. All firms may freely establish, acquire and dispose of their interests in business enterprises.
Microeconomic environment
The microeconomic environment includes the following factors,
Marketing intermediaries
Competitors
Suppliers
The marketing intermediaries are the various newspapers which all firms have access to. There is a single national broadcaster for radio and television and all firms have access to advertise their products. However, the major setback is that the larger part of the population does not have a culture of reading newspapers. They rarely watch the local television station or listen to the local radio stations, preferring content broadcasted from neighboring South Africa. These may also be considered as social factors, which negatively impact on the Francistown business environment. There is a missing vital link of communication between the firms and consumers.
To examine the effect of competitors and suppliers, we need to look at Francistown as a market for different products.
Liquor retail
Francistown has a monopolistic market structure. There are many firms, each having a small proportion of market share. The products are mainly the same since there is a sole brewery in the country which also does much of the importations of foreign liquor brands. The retail prices are governed by government legislation so firms engage in non price competition. This entails providing extra services such as a variety of prepared meals, barbeque facilities, high standards of hygiene, and big screen televisions for screening live football matches and general quality of service.
The percentage of alcohol consumers relative to the total population in Francistown is quite high. This is a social factor which is positive for this business. This means after the legislative time for closure of bars (10.30 pm), those liquor outlets with night club licenses will be best positioned to attract more customers. Offering night club services is a form of non price competition.
What makes the environment unfavorable for liquor retail business is
Small market base
Government legislation which stipulates bars to close early and which imposes huge liquor levies.
Fast food outlets
The market structure is monopolistic. There are handful outlets which specialize in different products eg barbeque, grilled, roasted and fried chicken. The Francistown population generally spends a lot of money on such luxuries. The biggest letdown is that there are a very large number of firms, offering a similar service in a very small market. This makes the business environment to be unfavorable
Clothes retail
The lifestyle trend of the Francistown population is characterized by good appearance. The people are huge spenders on clothing, which is good for business. The market is somewhere between being monopolistic and obligopsony because the city is one of the major destinations for Chinese made clothes so there are many retailers and fluctuating numbers of consumers, who can be very low. Competition is basically price based since most shops would be well stocked with clothes of all varieties. A shop that sells quality garments at cheaper prices definitely attracts more customers.
Cheaper prices attract some consumers from neighboring Zimbabwe. They are the reason why the numbers of consumers are difficult to predict. Demand for clothes is low as compared to other cities with larger populations like Gaborone; more so if there are low numbers of consumers coming from Zimbabwe. The environment is not good for business because of that reliance on cross border consumers whose shopping patterns are never constant.
Transport
This is an obligopsony market, characterized by many service providers but very few consumers. Majority of households own vehicles so users of public transport are not so many, as compared to cities where most people do not have cars. The competition is very high, and is non price. Pricing is controlled by government legislation so companies distinguish themselves by basically offering quality service to consumers, having special offers and maintaining a good reputation of being on time, cleanliness, and low occurrence of accidents.
Primary and Secondary Education
This is an oligopoly market, where there are three international schools. The greatest challenge faced by these schools is that the population does not have a culture of spending large sums of money on education. They would rather send their children to government schools where education is heavily subsidized and they pay almost nothing. The market base of these schools is made up of a few effluent families or expatriates, whose numbers keep dwindling because of tighter immigration laws. It is difficult for the firms to attract customers when the government offers an option which is very difficult to resist.
In conclusion, factors that create a hostile business environment in Francistown outweigh those which create a good environment. Due to the generally obligopsony type of market which prevails in almost all business sectors, consumers are spoilt for choice. The environment favors consumers rather than firms, so the main effect is that Francistown is the town for consumers to do shopping and not the city for firms to do business.
References
www.exchange-rates.org
www.cso.org.bw
www.state.gov
Krister Ahlesten – Essentials of microeconomics, Bookboon.com
MBAN-611DE BUSINESS ECONOMICS
ASSIGNMENT 2
Question 2
Critically examine the effectiveness of various approaches that may be used to reduce macroeconomic instability. Your answer should identify and show an understanding of the various policies that a country’s government and/or central bank may use to achieve generally accepted macroeconomic goals. You are also encouraged to suggest your own ideas as to what should be done to more effectively attain desired macroeconomic goals. In your answer, you should explicitly identify macroeconomic goals that governments generally pursue. Are these the most important or do you think governments should aim to achieve other goals?
(You are encouraged to make use of aggregate demand/aggregate supply analysis.)
By NELSON TAWANDA CHUMA
MBA (Management), University of Nicosia Online
Introduction
The Great Depression of 1929 up until 1939 was the most severe economic crisis of modern times. It was caused mainly by weaknesses and imbalances within the USA economy in the 1920s. The Great Depression was characterized by catastrophic collapse of stock market prices which in 1932 had dropped to 20% of their value in 1929, failure of banks and general loss of confidence in the economy from the citizens. This loss of confidence shrunk the economy because there were much reduced levels of spending, which led to reduced demand and production. The result was a 46% drastic fall in output and a rampant rise in unemployment which stood at around 25% of the workforce, according to The Great Depression, www.english.illinois.edu, retrieved on 6/3/2014.
Prior to the Great Depression, governments employed the Classical school of economic thought. It suggests that a free market economy can self regulate and self adjust towards equilibrium position without intervention. It introduces the fundamental idea of an invisible hand mechanism that can move a market to its natural equilibrium. It assumes that the prices of wages and commodities are extremely flexible, and that the aggregate production in an economy must generate enough income to purchase all of the economy’s output. With this approach, governments over relied on impersonal market forces to achieve the necessary economic correction.
However, market forces alone proved unable to achieve the desired recovery in the early stages of the Great Depression. This forced governments to adopt the Keynesian economics theory which suggests that government action must assume a principal role in ensuring economic stability in an industrialized nation with a market economy.
The Great Depression is a very good example of macroeconomic instability. Governments world over aim to prevent their economies from plunging into situations similar to those experienced during the Great Depression. To reduce macroeconomic instability governments come up with policies whose general objectives are;
Full employment
Price stability
High, but sustainable rate of growth
Keeping the balance of payments in equilibrium.
Aggregate Demand
These policies mainly focus on boosting Aggregate Demand, which is the demand for the Gross Domestic Product (GDP) of a country. Aggregate Demand is represented by;
AD = C + I + G + (X – M)
C – Consumer’s expenditure on goods and services
I – Investment spending by companies on capital goods
G – Government expenditure on publicly provided goods and services
X – Exports of goods and services
M – Imports of goods and services
Effective policies would target increasing C, I, G and X which are the positive ingredients for a high AD while minimizing M which is a reducing factor.
Policymakers have two main tools at their disposal, Monetary Policy and Fiscal Policy. Monetary policy which is drawn by the Central bank indirectly targets activity influencing money supply into the economy through adjustment of interest rates, bank reserve requirements and the purchase and sale of government securities and foreign exchange. Fiscal policy influence the economy by changing the level and types of taxes, external and composition of spending, the degree and form of borrowing as well as capital injection into the economy through its expenditure.
Fiscal Policy
This is drawn by the government, usually through the Finance Ministry so as to manage Aggregate Demand and generate economic stability. Consider when the goods market is in equilibrium at a certain point where total spending is equivalent to the level of output and income. That will be lower than the level of full employment. There will be unemployment and consequently macroeconomic instability. The government can then implement an expansionary fiscal policy which simply implies an increase in total spending. Government buys more goods from the economy thus making firms to produce more. Firms will employ more factors of production which include human labor. Household income increases, individuals spend more and the Keynesian multiplier factor applies. This increase in consumption further increases output from firms. Initial government spending (G on the AD equation) boosts Aggregate Demand, thus stimulating a cycle of rising output and income. Eventually, levels of employment will rise to relatively high levels as compared to before. This pushes the government closer to achieving one of its policy objectives.
Fiscal policy can also be aimed at reducing tax. If taxes are lowered people will have more disposable income and they will spend more. This means there will be a general increase in consumer expenditure on goods and services (C on the AD equation), production in firms will increase (I on the AD equation), and thus Aggregate Demand is boosted. Again with the help of the Keynesian multiplier this generates more spending, output and income. If properly managed, fiscal policy can be useful in managing Aggregate Demand and achieving macroeconomic stability.
However, fiscal policy formulation and the actual implementation are two different things. If a fiscal policy is not properly implemented, as is the case in most economies, it is doomed to fail. The biggest cause of fiscal policy failure is the time lag that exists between policy formulation and implementation. By the time the fiscal bill gets passed, there may be changes in the economy such that the policy will not be as helpful. There must be a way to expedite the implementation of a fiscal policy as soon as it is formulated.
Fiscal policies are sometimes drawn without accurate information about the levels to which demand has fallen. Economic indicators do not usually give very accurate information about the performance of the economy, mainly due to the fact that demand in a market is extremely difficult to predict. Also, when governments spend money to boost Aggregate Demand they increase taxes (This is because most countries in dire need of boosting their AD levels have been blacklisted by the IMF for failure to service existing loans, so they cannot secure any more loans e.g. Zimbabwe in 2008), or borrow money to pay for this which will plunge the country further into debt. If taxes are increased that will reduce consumer expenditure (C on the AD equation). Increasing government expenditure, yet reducing consumer expenditure is like taking a step forward with the right leg then a step backwards with the left. AD will remain rooted at the same level and the fiscal policy will obviously fail. When a fiscal policy is drawn, it is imperative to forsake some sources of government revenue like taxes so that there is no conflict in all the factors which affect AD. It is also important to draw an expansionary fiscal policy when the country is guaranteed of funds, not to make last minute decisions which contradict what is drawn in the plan itself or what economic theory suggest about that plan. Some countries end up printing more money to push forward the implementation of the policy, which will fuel up inflation.
Monetary Policy
Monetary Policy is the process by which the Central bank or monetary authority controls
Supply
Availability
Cost
of money to ensure macroeconomic stability. Objectives of the monetary policy are
Rapid economic growth
Price stability
Exchange rate stability
Balance of payment equilibrium
Full employment
Neutrality of money
Equal income distribution.
The instruments of monetary policy used depend on the level of deployment of the economy.
The primary tool of monetary policy is market operations. This entails controlling the money in circulation through trading in various financial instruments such as treasury bills, company bonds or foreign currencies. All of these result in more or less base currency entering or leaving market circulation. The Central bank may also provide credit to banks, or lend to financially stable institutions at reduced interest rates hence increasing the monetary base. This will indirectly supply money to firms, increase investment spending and output, as well as consumer spending thus the end result is an increase in AD, positive economic growth and higher employment levels. By buying and selling foreign currency the Central bank may also ensure that the exchange rate is at levels that do not affect domestic money supply in the undesired direction. This is done because the balance of payments can be in deficit or surplus, which affects monetary base, and hence money supply.
According to Gideon Gono, Monetary Economics and Central Banking – The International Experience and case for Zimbabwe, the main primary goal of central banks is price stability. Monetary policies are aimed at bringing inflation from generally high levels to what is considered acceptable, given a country’s inflation history. High inflation is harmful to achieving macroeconomic stability.
Agenor P and Montiel P.J (1996), Development Macroeconomics; Princeton University Press, suggest that efforts to combat high inflation are mainly made through three different approaches
Populist
Orthodox
Heterodox
The Populist approach has proved its failure to combat inflation as seen in Peru, 1986. The Orthodox and Heterodox approaches have had some positive outcomes, Argentina in 1985 and Chile in1973. (Statistics obtained from Gideon Gono, Monetary Economics and Central Banking – The International Experience and case for Zimbabwe).
However, the Orthodox and Heterodox approaches require fiscal policy adjustment. The monetary authorities would be forced to work closely with politicians in government and in most cases, to work under their directives. This means the Central bank would fail to achieve ‘goal independence’ and ‘economic independence’. They cannot independently set out their macroeconomic objectives and put mechanisms in place to achieve them. Politicians usually sacrifice the drawing up and implementation of sound economic policies at the expense of those that guarantee them political mileage and re-election.
The reason why the influence of Central banks in ensuring macroeconomic stability is limited is because of interference and influence from the government. As is the case in Zimbabwe, the President appoints the Central bank Governor who in turn reports directly to him. The Central bank is an arm of government which can never operate independently. To ensure macroeconomic stability, Central banks should be given a mandate to operate independently.
As pointed out by David Ricardo (1824), www.oll.libertyfund.org retrieved on 6/3/2014,
‘…The State could not be safely entrusted with the power of issuing paper money, it would certainly abuse it.. I propose to put this trust in the hands of Commissioners voted in or out entirely by parliament. I propose to prevent all intercourse between these Commissioners and Ministers, by forbidding any species of money transactions between them. These Commissioners should never, on any pretence, lend money to The State, or in the slightest degree to be under its control or influence.’
Monetary authorities must also aim to get as accurate information as possible about the performance of the economy by using efficient economic indicators. They should then make credible announcements and predictions about the economy which can be trusted by consumers and investors. If consumers and investors are in doubt about announcements coming from the central bank they will not be willing to spend, and they will not be willing to deposit their money in banks. They would rather keep their money at home, in the form of a stable currency like the US dollar or the British pound, then employ a wait and see approach. Aggregate demand will definitely fall, and the economy will keep struggling.
In conclusion, an improvement which also ought to be done when drafting monetary policies is to take a holistic approach in economic analysis, instead of the single variable approach that is usually done. According to Arthur Mutambara, www.newzimbabwe.com/pages/inflation80, retrieved on 4/3/2014,
‘A major flaw of the monetary policy is a single variable approach to economic analysis. Inflation is separately identified as enemy number 1, corruption as the second one. Other economic cancers are disjointedly identified as currency devaluation, exchange rate instability, poor agrarian productivity and lack of investment. Monetary policy frameworks are then developed separately from each other. This is completely unsound and ineffective. These economic variables are interconnected and interdependent. What is required is a multi-variable economic analysis and policy formulation that take into account the interconnectedness of the different issues.’
References
1. Gideon Gono, Monetary Economics and Central Banking – The International Experience and case for Zimbabwe).
2. Agenor P and Montiel P.J (1996), Development Macroeconomics; Princeton University Press
3. www.newzimbabwe.com
4. www.oll.libertyfund.org
5. www.english.illinois.edu
6. Pierre-Richard Agénor and Luiz A. Pereira da Silva, Macroeconomic Stability, Financial Stability and Monetary Policy Rules
