Assessing the potential of different economies — Edexcel A-Level Economics B
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Assessing the potential of different economies explained
Assessing the potential of different economies covers 2 specification points, including O levels and growth of disposable income o… and O costs of production o skills and….
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Open a point below for its explanation and revision guidance.
a) Factors influencing expansion into a market: o levels and growth of disposable income o ease of doing business o infrastructure o political stability o exchange rate
When a business expands into a new international market to sell its products, it evaluates several key factors. High levels and rapid growth of disposable income indicate strong potential consumer demand. The ease of doing business, such as straightforward regulations for starting a company, reduces setup barriers. High-quality infrastructure, including reliable transport and communication networks, ensures efficient distribution. Political stability minimises the risk of sudden policy changes or conflict disrupting operations. Finally, a favourable exchange rate can make imported goods cheaper for local consumers or increase the repatriated profits for the expanding firm, depending on its pricing strategy.
b) Factors influencing the location of production sites: o costs of production o skills and availability of labour force o infrastructure o location in trade bloc o government incentives o ease of doing business o political stability o natural resources o likely return on investment
Selecting a production site requires balancing multiple factors to maximise the likely return on investment. Firms seek low costs of production, including cheap land and utilities, alongside the necessary skills and availability of the labour force. High-quality infrastructure is vital for receiving raw materials and shipping finished goods. Location in a trade bloc allows tariff-free access to larger markets, while government incentives like tax breaks reduce initial outlays. The ease of doing business and political stability ensure smooth, uninterrupted operations. Finally, proximity to essential natural resources can significantly cut transport costs for primary and secondary sector businesses.
Your focus
- Analyse how levels and growth of disposable income affect potential demand in a new market.
- Evaluate the impact of infrastructure and ease of doing business on the operational costs of market entry.
- Assess how political stability and exchange rate movements influence the risk and profitability of international expansion.
Show all 6 objectives
- Evaluate how costs of production, labour skills, and natural resources determine the optimal location for a production site.
- Analyse the role of infrastructure, trade blocs, and government incentives in reducing operational and distribution costs.
- Assess how ease of doing business, political stability, and the likely return on investment influence long-term strategic location decisions.
Assessing the potential of different economies exam tips
Marking Points
- Identify how rising disposable income in a target market shifts the demand curve for normal goods to the right.
- Explain how a high ranking in the ease of doing business index lowers the administrative costs of market entry.
- Assess how poor infrastructure increases transport costs and delivery times, reducing competitiveness.
- Evaluate the impact of political instability on the risk premium required by investors before committing capital.
- Calculate or interpret how a depreciation of the target market's currency reduces the purchasing power of local consumers buying imported goods.
- Identify how lower costs of production and government incentives directly improve the likely return on investment for a new facility.
- Explain how location in a trade bloc eliminates tariffs and quotas for exporting to member countries.
- Assess the trade-off between the low cost of unskilled labour and the need for specific skills and availability of the labour force.
- Evaluate how poor infrastructure and political instability can offset the benefits of abundant natural resources.
- Analyse how the ease of doing business reduces the time and capital required to establish a production site.
Examiner Tips
- 💡When evaluating market expansion, link the growth of disposable income specifically to the income elasticity of demand for the firm's product.
- 💡Use the exchange rate to determine the price competitiveness of exports versus the cost of setting up local operations.
- 💡Contrast infrastructure quality with the ease of doing business to provide a nuanced assessment of non-financial barriers to entry.
- 💡Always link the choice of production location to the firm's specific needs, such as whether it requires highly skilled labour or proximity to bulky natural resources.
- 💡Use location in a trade bloc as a key evaluative point when discussing how firms bypass protectionist barriers.
- 💡Weigh government incentives against long-term factors like political stability and infrastructure when assessing the likely return on investment.
Common Mistakes
- Assuming a strong domestic exchange rate always benefits expansion; correction: a strong domestic currency makes exports to the new market more expensive, potentially reducing demand.
- Confusing total GDP with disposable income; correction: disposable income accounts for taxes and benefits, providing a more accurate measure of consumer spending power.
- Treating political stability and ease of doing business as identical; correction: political stability refers to the likelihood of government overthrow or conflict, whereas ease of doing business relates to regulatory efficiency.
- Assuming low wages always mean low costs of production; correction: low wages must be weighed against labour productivity to determine unit labour costs.
- Confusing market expansion with production location; correction: locating production in a country does not necessarily mean selling the product in that country's domestic market.
- Believing government incentives permanently reduce operating costs; correction: incentives are often temporary grants or tax holidays that affect initial setup rather than long-term viability.