There are many ways to access the uncertainty in the general business environment. Two simple measures could be business activity (less will be sold in uncertain times) and levels of capital investment (firms, like individuals, save when the business environment is less favourable). Another way is to develop an index of business confidence, which measures the overall attitude of business towards their current situation and future prospects.

Take for example the IFO Business Climate Index (an index of German business confidence), which is calculated monthly by the IFO Institute for Economic Research in Munich, Germany. This index uses a survey of 7000 firms in construction, manufacturing, services, wholesale and retail. The firms are asked to assess their current business situation as poor, satisfactory or good. They are also asked to assess their prospects for the next six months. Combining these two measures into an index, an assessment is made about how confident businesses feel. If the index is declining, confidence is lacking and businesses are effectively uncertain about the future. The IFO Index is an important measure in a European sense, as Germany is one of Europe largest economies.Most countries have similar indices. For example, the South African Chamber of Commerce and Industry reported in January 2011 that their business confidence index rose slightly towards the end of 2010. According to the Chamber, uncertainly over unemployment figures and industrial unrest still loomed, hence the small rise.

Questions 

1 Would a management accountant use indices like those mentioned above in evaluating decisions or providing information?

2 What economic factors might reduce business uncertainty?