BTEC LEVEL 3 Business[

UNIT 38: P1 & D1

!

The Business & Economic Environment

Introduction
In this formal report, I will present the effects of the business and economic environment on
Midland Realty, Hong Kong. Midland Realty is a leading property agency in Hong Kong that sells
and leases residential, commercial and office property. I will explain exactly how numerous factors
affect the business of the company and how their business is affected.
Table Of Contents
1.0 The Economic Cycle
1.1 Economic Boom
1.2 Economic Slowdown
1.3 Economic Recession
1.4 Economic Recovery
2.0 Levels of Unemployment
2.1 Factors That Cause Unemployment
2.2 Low Unemployment Rate (Hong Kong)
2.3 High Unemployment Rate
3.0 Level of Inflation
3.1 Inflation
3.2 Deflation
4.0 Current Account Surplus/Deficit
4.1 Trade Surplus
4.2 Trade Deficit
5.0 Government Borrowing

What is an Economy?
An economy is a method of which money is flowed through numerous economic factors. These
include government, business and consumer factors. These three factors and how money is traded
between them make up an economy
1.0 THE ECONOMIC CYCLE
The economic cycle is a numerous-staged process of economic statuses a given economic
environment is in. Economies all over the planet are constantly changing in both positive and
negative ways. These economic changes have affects on governments, businesses and individuals.
In regards to Midland Realty, the status of the economic cycle can determine how well their
business is doing and how strong their sales can potentially be. Described below are the numerous
statuses an economy can be positioned, in an economic environment.
1.1 Economic Boom
Dominic Clark

BTEC LEVEL 3 Business[

UNIT 38: P1 & D1

!

An economic boom is when an economy is in a prominent amount of economic growth. An

economic boom occurs when products in an economic environment is high, when the level of
unemployment is low, when salaries and staff compensation is increasing, when sales revenues and
business profits increased, when bank interest rates increase, when the level of investments are
increased and when the GDP is increased.
Short Term Effects of an Economic Boom
Demand increases rapidly
Sales revenue increase

Long Term Effects of an Economic Boom

Potential tax decrease (increases profit)
Higher costs (staff wages, utilities)
Business reports higher sales
Increases annual profits
Advantages of an Economic Boom
There are many benefits of an economic boom to Midland Realty. First of all, in an economic boom
the demand of housing increases due to the higher level of employment and increasing
compensation amongst citizens. With there being more people in jobs and earning more money,
there is an increase of individuals with a higher level of spending power, and therefore an increased
number of potential property buyers. This means that there is a greater frequency of potential buyers
and possibility to increase housing prices for the agency.
In addition to this, if citizens in Hong Kong are earning increased wages, banks will give out more
loans. This is due to the fact that the likelihood of loans being payed back is higher and interest
rates can be increased.
Disadvantages of an Economic Boom
On the other hand of the benefits of an economic boom, there are also some costs to the housing and
property market, and more particularly, Midland Realty. The issue with an ongoing succession of
the housing market can mean that new real estate agencies could potentially emerge or large firms
not already situated in Hong Kong can set up in the SAR and take some of Midland Realtys market
share.
In an economic boom, staff expect higher wages, including the staff working in the real estate
sector. As a result, this means that midland realty are expected to compensate their staff with higher
wages during times of economic succession. Also, other fixed costs such as utilities could
potentially increase as citizens have more money to spend.
Economic Boom: Good or Bad?
I believe that the advantages of an economic boom majorly outweigh the disadvantages. Midland
Realty can afford to be paying higher costs for utilities and wages when they are generating
increased sales revenue. Also, the business can afford to have some competition as they are already
Dominic Clark

BTEC LEVEL 3 Business[

UNIT 38: P1 & D1

!

a well established and regarded brand in Hong Kong who have great brand perceptions in the
region.
Likelihood of Occurrence
I believe in the Hong Kong economy, an economic boom is very likely to occur given it is a trade
capital of the world and the amount of money being traded in the city is immense. Hong Kong offer
many job opportunities and provide services to countries all over the world, therefore the economy
is booming much of the time.
1.2 Economic Slowdown
An economic slowdown is when the level of economic growth is decreasing in a given economic
environment. In these situations, the level of supply is still increasing. This situation poses many
issues for the housing market and Midland Realty as they would still be staffed and be paying for
the economy to be good when there is a potential recession in view for the near future.
1.3 Economic Recession
An economic recession is when an economy has been shrinking for a period of two or more quarters
of a year. When a recession occurs, the demand of products begin to decrease and unemployment
increases in that economic environment.
Short Term Effects of an Economic Recession
Prices fall
Unemployment increases
Interest rates decrease
Long Term Effects of an Economic Recession
GDP decreases
People save money
Governments spend more
Potential tax increase
Advantages of an Economic Recession
Although an economic is a bad time for many businesses to do business and has a major affect on
sales in the housing market, there are some benefits for midland realty. A benefit of being in an
economic recession is that some of the smaller property agencies may be forced to close down or
leave Hong Kong.
Costs such as employee wages and utilities will become cheaper, saving the company from paying
high costs.
Disadvantages of an Economic Recession
There are many disadvantages of an economic recession as it is a very unfortunate time for
businesses. In a recession, there is a higher unemployment rate, as businesses have less demand.
Also in a recession, as demand for products and services are lowered, people are paid less
Dominic Clark

BTEC LEVEL 3 Business[

UNIT 38: P1 & D1

!

compensation. Due to a higher unemployment rate and decreased salary, there would therefore be
decreased numbers of people who will be in jobs and therefore be in position to buy property in
Hong Kong. In addition ,as demand decreases, the prices of property is driven down meaning that
midland realty have a lower revenue potential for midland realty.
Economic Recession: Good or Bad?
I believe that an economic recession would be a bad time for most businesses, especially housing
agents like Midland Realty. In a recession, the demand for housing is lower as there is less spending
ability amongst the population and prices are forced to be driven down, providing even smaller
commission for Midland Realty.
Likelihood of Occurrence
Given that Hong Kong is such a prominent trade capital of the world, it makes it very difficult for
the Hong Kong economy to fall massively. It isnt very likely for the economy in Hong Kong to go
into recession. However, as China have limited the number of entires their citizens have to Hong
Kong, that can play a major effect on Hong Kong tourism, and possibly the overall economy.
Currently the economy of Hong Kong is growing, however, as the stock market crashed in China
means that the Hong Kong market may suffer.
1.2 Economic Recovery
An economic recovery occurs when a specific economy has gotten to the lowest level, that recovery
is the next level forward. Often, for recovery to work a boost in terms of making the population
richer to allow more circulation of funds in the economic environment.
2.0 LEVELS OF UNEMPLOYMENT
The levels of unemployment are the scales of how much of the population in a given economic
environment is unemployed and currently living without a job. Students, housewives and retired
citizens are excluded from this scale.
2.1 Factors That Cause Unemployment
Real wage unemployment - Wages in Hong Kong are high, some operations of companies move
to cheaper countries.
Demand Deficient Unemployment - When demand decreases. Happens in a recession.
Frictional Unemployment - People transitioning between education and a job.
Structural Unemployment - When labour is replaced by capital substitution.
2.2 Low Unemployment Rate (Hong Kong)
In Hong Kong, the current unemployment rate is at 3.3% which accounts for approximately
134,000 people out of the 7.188 million inhabitants that live in the Special Administrative Region.
(South China Morning Post). For an economic environment, the unemployment rate of Hong Kong
is very low, signifying the strength of the Hong Kong economy.
Advantages of Hong Kong Unemployment Rate (Low)
Dominic Clark

BTEC LEVEL 3 Business[

UNIT 38: P1 & D1

!

The advantages of a low unemployment rate means that a very high percentage of the population
are in jobs and have money. With an increased number of citizens having money, means that there is
a greater number of people who have the ability to purchase property in Hong Kong.
More jobs also mean a wealthier population, as there are more people generating income. With
people having a greater amount of money means that there is a higher demand for products and
services. As a result, this means that there is an increased demand for housing and property in Hong
Kong which then drives up the prices of property as more people can afford it.
Disadvantages of Hong Kong Unemployment Rate (Low)
For Midland realty there are very few reasons why they would be unhappy with a low
unemployment rate. A cost to Midland Realty in a time where there are more citizens being able to
purchase housing means a larger workforce to accommodate the demand. With increased numbers
of staff means increased expenditure to the company for wages.
Short Term Effects of a Decreased Unemployment Rate
Increases prospects for purchasing property
Increased sales opportunities
Increased commission
Prices of property increases
Long Term Effects of a Decreased Unemployment Rate
Increased sales revenue
More houses/flats sold
Larger workforce needed
Increased profits
Government receives more tax
Likelihood of Low Unemployment Rate
The likelihood of a remained low unemployment is very high as Hong Kong has a great variety of
jobs and businesses to choose from. The amount of Hong Kong businesses are increasing and more
job openings are provided. This is very beneficial for the housing market as demand should
continue to increase.
Low Unemployment Rate: Good or Bad?
I believe that a low unemployment rate is beneficial to the housing market to keep demand high and
increase the buying potential of property from Midland.
2.3 High Unemployment Rate
A high unemployment rate is when a large percentage of the total population are out of jobs and do
not have employment. Hong Kong is very far from reaching a high unemployment rate as they have
one of the lowest rates in the world.

Dominic Clark

BTEC LEVEL 3 Business[

UNIT 38: P1 & D1

!

Advantages of High Unemployment Rate

There are very few benefits to having a high employment rate as it means that there is less potential
demand due to the fewer people being able to purchase housing. However, with a high
unemployment rate, Midland Realty have the opportunity to cut costs due to the fact that demand
decreases. They can let less successful staff go and close down numerous branches.
Disadvantages of High Unemployment Rate
Many disadvantages of high unemployment apply. First of all, with a high unemployment rate the
potential buyers of property in Hong Kong decreases due to the reduced amount of citizens being
secured by jobs. A low demand then results in the prices of the housing market having to be
decreased and therefore, a smaller commission for realtors such as Midland. As a result, less sales
revenue and profits will be generated in that time period.
Short Term Effects of an Increased Unemployment Rate
Demand starts to increase
More jobs are lost
Property prices decrease
Commission for midland decreases
Long Term Effects of an Increased Unemployment Rate
Less tax money for the government
Less sales revenue for Midland
Less Profit
Workforce may need to be cut
3.0 LEVEL OF INFLATION
This section describes the levels of inflation/deflation in Hong Kong and the respective benefits to
both inflation and deflation to the housing market and Midland Realty.
3.1 Inflation
Inflation is when the price of goods and services in an economic environment increases over a set
timeframe. As a result of the prices increasing, a unit of currency therefore has less value. The
current inflation rate in Hong Kong is 3.5% from last year. What this means is the price of goods
and services have increased by 3.5% from last year.
Advantages of Inflation
For businesses there are is a good variety of benefits of inflation, especially to the housing market.
When inflation occurs, employees of companies begin to expect higher wages due to the increase of
sales revenue made by businesses. As a result of higher wages, working people in Hong Kong have
more money and therefore have a higher ability to purchase housing in Hong Kong. Inflation will
also drive up the prices of property, leading to Midland Realty being able to obtain a higher
commission of property sales.

Dominic Clark

BTEC LEVEL 3 Business[

UNIT 38: P1 & D1

!

Disadvantages of Inflation
The disadvantage of inflation for Midland Realty is the increase of costs they would have to face in
regards to labour, utilities and other general costs to the company. Midland Realty would have to
spend money recruiting new staff as they will need a larger workforce to accommodate for the
greater demand.
Short Term Effects of Inflation
Prices Increase
Increased sales opportunity
Increased commission
Long Term Effects of Inflation
Increased Sales Revenue
People have more money
Increase of workforce
Increased profits
Likelihood of Inflation
Given that Hong Kong has more and more businesses emerging all the time with increased trade
occurring in the economic environment, it means that there has been a long continuation of inflation
year-on-year, making the likelihood of inflation very high.
Inflation: Good or Bad?
Although the value of money begins to have less value and for many, it may seem that goods and
services become more expensive, for businesses in Hong Kong inflation is a good thing. For
Midland Realty it is definitely a plus given that they can increase prices during times of inflation
when people have money to also increase demand.
3.2 Deflation
Deflation is when the value of currency becomes increases and prices go down, meaning that you
can get more for a single-unit of currency.
Advantages of Deflation
Although deflation is a time that signifies the weakness of an economy, there are a handful of
benefits. During deflation, you can have more value for the money that you already have as the
current goods and services would decrease in price. For Midland Realty, this means that their costs
would become cheaper and they would pay less for labour costs.
Disadvantages of Deflation
There are many disadvantages of deflation as it means the economy in a specific economic
environment is shrinking. Deflation decreases the prices of goods and services, meaning that
businesses would therefore generate less profit and therefore, employees will not receive large
bonuses and the level of unemployment could increase. As a result, this means that there are fewer
people able of purchasing property and housing.
Dominic Clark

BTEC LEVEL 3 Business[

UNIT 38: P1 & D1

!

Short Term Effects of Deflation

Prices decrease
Decreased sales commission
Decreased sales opportunities
Long Term Effects of Deflation
Decreased Sales Revenue
People have less money
Decrease of workforce
Decreased profits
Likelihood of Deflation
With Hong Kong being such a huge trade capital, there is very little chance that the inflation rate
would show up as negative. It has been increasing for such a long time with much more progress in
terms of emerging businesses, that deflation should not be a major issue in the SAR.
Deflation: Good or Bad?
In conclusion, deflation is really not a good thing as it brings down both prices and demand for the
housing market, making it a very difficult situation to purchase property.

4.0 CURRENT ACCOUNT SURPLUS/DEFICIT

4.1 Trade Surplus
Trade surplus is when the value of export in an economic environment is greater than the value of
importation. Hong Kong has a trade surplus as it has one of the worlds largest ports for shipping
and one of the busiest shipping lanes. Hong Kong exports many goods from China to the rest of the
world. In addition, Hong Kong also sells a lot of services to other countries.
Advantages of Trade Surplus
The advantage of a trade surplus means that there is an increased GDP (Gross Domestic Product).
This means that there are businesses making more money, that need more employees to
accommodate the demand of importation. As a result, this means that there are more people
employed and more people that have money to spend. What this then means is that people can
afford housing in Hong Kong.
Disadvantages of Trade Surplus
The disadvantages of a trade surplus is that there is a larger workforce needed as there would be
more staffing needed to match the demand of people purchasing housing in Hong Kong.
Short Term Effects of Trade Surplus
Increased commission
Increased prices
Dominic Clark

BTEC LEVEL 3 Business[

UNIT 38: P1 & D1

!

Long Term Effects of Trade Surplus

Increased sales revenue
Increased profits
Increased customers
Trade Surplus: Good or Bad?
In conclusion, I think that a trade surplus is good as it majorly increases the amount of money that
can be circulated in Hong Kong. With this, it means that the businesses in Hong Kong employ more
staff and pay employees more to enable them the opportunity to purchase a house/flat.
4.2 Trade Deficit
Trade deficit is when the value of import in an economic environment outweighs the value of
exportation.
Advantages of Trade Deficit
The advantages of a trade deficit is that costs at Midland Realty can be lowered due to the fact that a
smaller workforce would be needed when the GDP is lower. This means that Midland can have less
expenditure.
Disadvantages of Trade Deficit
If Hong Kong imported more than they exported it would decrease the number of expats, as well as
Hong Kong citizens as a whole as many of Hong Kongs job are made up of imports and providing
services to other countries. With a smaller population, and a poorer population, it puts a really
majorly negative affect on the housing market as demand would be low and prices would have to be
brought down.
Short Term Effects of Trade Deficit
Decreased commission
Decreased prices
Long Term Effects of Trade Deficit
Decreased sales revenue
Decreased profits
Decreased customers
Trade Deficit: Good or Bad?
Trade deficit may not always be a bad thing, but given that Hong Kong relies on the business of
importation and providing services offshore, it means that a Trade Deficit would really bring down
the Hong Kong economy.

Dominic Clark

BTEC LEVEL 3 Business[

UNIT 38: P1 & D1

!

5.0 GOVERNMENT BORROWING

Government spending is when a government borrows money from other countries or businesses.
This puts that country in debt to company that they borrow from.
Advantages of Government Borrowing
The advantages of government borrowing for the housing market is that the government has more
money to inject into the economy so that citizens have a greater chance at being able to purchase a
house/flat.
Disadvantages of Government Borrowing
The disadvantages of government borrowing is that it puts the country in debt, and may later affect
the citizens of Hong Kong if the taxes have to be increased. If this happens, less people would be
able to purchase housing.
Short Term Effects of Government Borrowing
More money in the economy
Better economic circulation
Boosts economy
Long Term Effects of Government Borrowing
Debts to other countries/businesses
Increased taxes
Tax cuts elsewhere
Likelihood of Need for Government Borrowing
As the Hong Kong government are very well off in the sense that they have enough money to pay
all of their expenditures. Hong Kong last year had gotten to the point where they refunded a small
percentage of tax money because they had managed to pay off their expenditures with remains. This
means that Hong Kong do not have a high need of borrowing from other countries.
Government Borrowing: Good or Bad?
I believe that government borrowing is only good when it is needed in an economic environment to
boost the economy and attempt to recover from a recession. If a country is doing well, there may
not be too much of a need to do this, unless governments can predict growth after they invest.

Dominic Clark

BTEC LEVEL 3 Business[

UNIT 38: P1 & D1

!

Bibliography
"Topics." South China Morning Post. N.p., n.d. Web. 8 Sept. 2015
[www.scmp.com/topics/unemployment-rate]
"Total Population (in Number of People)." Total Population (in Number of People). N.p., n.d.
Web. 8 Sept. 2015.[http://data.worldbank.org/indicator/SP.POP.TOTL]
Bevan. J., Coupland-Smith. H., Dransfield.R. Goymer.J., Richards., BTEC National Business
Student Book 2010

Dominic Clark