1.5 - Understanding External Influences on Business Flashcards
What is a stakeholder?
+A stakeholder is anyone who’s affected by a business - Even small businesses may have lots of stakeholders.
What do different stakeholders have?
+Different stakeholders have different ideas of success.
How are different stakeholders affected by a business?
+Different stakeholders are affected by a business in different ways.
+This means they have different opinions about what makes a firm successful and what its objectives should be.
Give examples of different stakeholders.
- Owners
- Managers
- Employees
- Suppliers
- The local community
- The government
- Customers
- Pressure groups
What is an owners perspective of business success?
+The owners are the most important stakeholders - they make a profit if the business is successful and decide what happens to the business.
+In a limited company, the shareholders are the owners - Shareholders usually want high dividends, and a high share price.
What are dividends?
+Dividends are payments that the shareholders get if the company makes a profit.
+The more shares a shareholder owns, the higher the dividend will be.
What are managers/employees perspectives of business success?
+Managers and other employees are interested in their job security and promotion prospects.
+These are improved if the firm is profitable and growing.
+Employees also want a decent wage and good working conditions - so they may benefit most when objectives are based on profitability, growth and ethics.
What is a supplier’s perspective of business success?
+A firm buys raw materials from suppliers.
+If the firm is profitable and grows they’ll need more materials and the supplier will get more business.
+So suppliers benefit most when the firm sets objectives on profitability and growth.
What are the local communities’ persective of business success?
+The local community where the business is based will suffer if the firm causes noise and pollution - they may gain if the firm provides good jobs and sponsors local activities.
+If the business employs local people, these employees will then have money to spend in local shops, which is good for the local economy.
+So the community may benefit when objectives are based on minimising environmental impacts, ethical considerations, profitability and growth.
What is the governments’ perspective of business success?
+The government will recieve taxes if the firm makes a profit.
+They may benefit most when objectives are based on profitability, growth or job creation.
What is a customers perspective of business success?
+Customers want high quality products at low prices.
+They benefit when objectives are based on customer satisfaction.
What is a pressure groups’ view on business success?
+A pressure group is an organisation that tries to influence what people think about a certain subject.
+They can influence the decisions a firm makes by creating bad publicity for the firm if they don’t agree with the firm’s actions - [Eg. in 2015, farming pressure groups such as Farmers For Action, held nationwide protests about the low prices some supermarkets paid for milk].
+Many pressure groups are satisfied when businesses set objectives based on ethical considerations or minimising environmental impacts.
What do Stakeholders influence?
+Stakeholders influence business decisions to varying degrees.
What do owners make in a firm?
+The owners make the decisions in a firm, so they’re the most influential stakeholders.
+However, they need to consider the interests of other stakeholders when they’re setting their objectives.
What will stakeholders often have?
+Often, stakeholders will have conflicting opinion about the firm’s objectives and its activities.
+The firm may decide to ignore the opinions of some stakeholders, but they’ll need to take others into account if they want to survive as a firm.
What stakeholders will businesses need to take into account in order to survive?
- No business can ignore its customers - If it can’t sell its products it won’t survive.
- A business may want to hold onto its money for as long as possible, but suppliers will become unhappy if they’re not paid in time.
- If a business doesn’t have happy workers it may become unproductive.
- But a company may not mind being unpopular in the local community if it sells most of its products somewhere else.
What does E-Commerce mean?
+E-Commerce means buying and selling online
What is E-commerce?
+E-commerce is using the internet to buy or sell products
What do many firms now have?
+Many firms now have websites where customers can buy their products
What results in E-commerce?
+E-commerce means that firms can reach wider markets comapared to just having traditional shops.
+Eg. a small business in Dorset could end up selling products to someone in New Zealand.
Who can E-commerce be convinient for?
+E-commerce can be really convenient for consumers - it means they can buy products from all over the world, at any time of the day and they don’t have to spend ages queuing up to buy products.
Why do firms have to adapt to E-commerce?
+Firms have to adapt to e-commerce because it’s become more importat.
+For example, they’ve had to build websites, employ IT specialists and develop systems to distribute products to online customers.
How can firms communicate?
+Firms can communicate digitally
What to firms regularly need to do?
+Firms regularly need to communicate with their stakeholders.
+There are many ways firms can use technology to do this:
- Websites
- Mobile Apps
- Live Chats
- Video calls
How can firms communicate with their stakeholders using websites?
+Websites are a great way to communicate with customers - eg. by posting blogs or providing customer service [such as FAQs].
+Websites can also be used to publish reports to shareholders.
How can firms communicate with their stakeholders using email?
+Email is a very quick way of communicating with stakeholders, either on a personal level [eg. to respond to a customer query] or on a bigger scale [eg. to tell all employees they can go home early].
How can firms communicate with their stakeholders using mobile apps?
+These are programs used on mobile devices, such as smartphones or tablets.
+They are usually used by firms to communicate with customers, for example by giving information about where stores are located, the products the company sells and any special offers.
How can firms communicate with their stakeholders using live chats?
+Live chats are an instant messaging service - They have many uses [eg. employees can use them to talk to each other from different locations, or customers can use them to speak with a customer service advisor via the internet.]
How can firms communicate with their stakeholders using video calls?
+Employees who work for the same business in different locations may use video calling to hold meetings, rather than travelling to meet.
+This can also be a good way for businesses to communicate with important shareholders, who may all live in different places.
Who is social media becoming more important to?
+Social media is becoming more important to businesses.
What does social media make it really easy for businesses to do?
+Social media makes it really easy for users to share information with other users - information can be in many forms, such as written messages or articles, pictures, videos, or links to other sites.
+This means social media is a great way for businesses to communicate - it can be used to display lots of different types of information, it can be updated regularly and it can be seem by loads of people at once.
What do businesses use social media for?
+Businesses use social media for all sorts of purposes - eg. to provide customer service, to advertise their products, or to promote local events.
What do customers expect businesses to be up to date with?
+Customers expect businesses to be up to date with technology.
+Nowadays people are used to being able to find information instantly at any time.
+Businesses that don’t change will probably have a hard time surviving.
What has technology made it easier to do?
+Technology has made it easier for us to pay for products.
Whst are the new payment systems?
+There are now lots of different payment systems that can be used to pay for products - Eg:
- Online Payments
- Chip and PIN
- Contactless payments
What are online payments?
+Nearly all firms allow you to pay online by entering your debit or credit card details.
+But there are other online payment systems [eg. PayPal] that mean you don’t have to enter your card details on every website you buy from, and offer a higher level of cyber-security [so your bank details are less likely to get nicked].
What is Chip and PIN?
+This is where you put your debit or credit card into a terminal [a machine at a checkout] and enter your unique PIN to pay.
+If you lose your card, you know that someone else can’t go on a spending spree with it unless they know your PIN.
What are contactless payments?
+This is where you pay for something just by holding your debit or credit card or smart device near a terminal.
+[Using a smart device for contactless payments involves downloading an app first - eg. Apple Pay or Android Pay].
What does having safer and easier and faster payment systems mean?
+Having safer and easier payment systems can encourage customers to shop with the firm.
+Faster payment methods also mean that businesses can serve more customers in any given time, so their revenue could increase.
What has technology changed?
+Technology has changed the way businesses operate
What do firms need to adapt to stay competitive?
+Firms need to adapt to changes in technology so they stay competitive.
+For example, if a firm’s competitors are communicating with customers using apps then the firm should also consider doing this.
What can businesses often use new technology for?
+Businesses can often use new technology to carry out processes in the place of people.
+This can lead to reduced costs in the long-term [eg. because fewer man-hours are needed to carry out tasks]
What are the downsides to adapting to new technology?
+However, adapting to new technology can be expensive.
+For example, a business may have to buy equipment or train staff to use new computer systems.
+They may also need to hire staff with the skills to use the new technology which is more expensive.
What are the advantages of using new technology?
+New technology can lead to increased sales for a business.
+For example, e-commerce may boost a firm’s sales as they can reach a bigger market.
+Modern payment systems may lead to increased sales as it’s easier and faster for people to buy products so they may buy products more often from the firm.
How can new technology affect a firm’s marketing mix?
+New technology can also affect a firm’s marketing mix.
+Eg. E-commerce means that customers have more choice of firms to buy from as they can buy from firms in places all over the world, not just in their local area.
+This means that firms may need to change their pricing strategies or the way they promote their products to become more competitive.
What does the growth of social media result in?
+The growth of social means that many firms are choosing to promote their products through this channel rather than through more traditional routes, such as newspaper adverts.
Give an example of a business using modern technology for business success.
- In 2015, Katie Patel bought Glisten Up Cars, a car wash firm - When she bought the firm it was close to going bust, but Katie made it profitable again within two years.
- Katie bought handheld contactless payment terminals, which meant that people could pay for their car wash from their cards, rather than having to pay in cash or go into the office - This was more convenient for customers, so sales increased.
- Katie also set up a website to inform customers about the firm, and set up social media accounts to advertise the firm and promote its special offers - these measures also led to increased sales.
What is employment law?
+‘Employment law’ describes the many different laws associated with the relationship between employers and employees.
+The laws are generally about pay, recruitment, discrimination and health and safety.
What do businesses have to pay staff?
Businesses have to pay staff a minimum amount.
What laws are there on the minimum amount employers have to pay?
+There are laws about the minimum amount employers have to pay their staff.
What is the National Minimum Wage?
+Workers aged 24 and under but of school leaving age have to be paid the National Minimum Wage [NMW] - the exact amount depends on the age of the and the type of work.
What is the National Living Wage?
+Workers aged 25 and over have to be paid the National Living Wage [NLW] - this is slightly more than the National Minimum Wage.
What do the NMW and NLW result in?
+The NMW and NLW mean that companies can’t cut their costs by paying workers less than the legal minimum - if they do, they’re breaking the law.
Does the NMW and NLW increase?
+Yes, the NMW and the NLW are usually increased each year.
What happens if a company doesn’t pay its workers enough?
+If a company doesn’t pay its workers enough, it could be given large fines.
+It could also get bad publicity, and consumers might stop using the business.
What can the NMW and NLW increase?
+The NMW and NLW can increase a firm’s costs - this can lead to increased prices, meaning a possible fall in sales and a reduced income for the firm.
+Some firms may not be able to afford to pay the NMW or NLW to all of their staff, so may have to lose some staff in order to survive.
What are the benefits of the NMW and NLW?
+The NMW and NLW can have benefits - they can lead to better motivated staff and increased productivity.
What are there laws about?
+There are laws about recruitment
What must recruitment procedures not do?
+Recruitment procedures must not discriminate against anyone because of, for example, their religion, gender, race, age, sexual orientation or because of disabilities - this is covered by the equality Act 2010.
What must firms make sure that new recruits have?
+Firms must make sure that any new recruits have a legal right to work in the UK.
+This can involve extra work for firms as they may have to carefully check new recruits’ documents [eg. passports and visas], but employing people illegally can result in big fines and possibly even the closure of the firm.
What can’t businesses do?
+Businesses cannot discriminate
What is the other main equal opportunity issue?
+Apart from recruitment, the other main equal opportunities issue covered by the Equality Act 2010 is pay.
+All employees must be paid the same if they do the same job [or work of equal value] for the same employer.
+If a company is found to have discriminated against someone, they’ll have to pay compensation.
What happens if an employee is accused of discrimination?
+If any employee is accused of discrimination, the company could also be held responsible.
+So companies need to take reasonable steps to prevent discrimination within the workplace - such as staff training and writing company policies about equal rights.
What does a workplace need to be?
+The workplace needs to be safe
What does health and safety legislation help make sure?
+Health and safety legislation helps to make sure that risks to people at work are properly controlled.
What are risk assessments?
+Firms need to carry out risk assessments to identify possible dangers and take reasonable steps to reduce the risks.
+Eg. accident books need to be kept, and first-aiders trained.
+All staff must receive health and safety training and suitable equipment must be provided [eg. hard hats on building sites].
What should a safe working environment mean?
+A safe working environment should mean fewer accidents, and so fewer injuries.
+And hopefully it means a more productive workforce too - since people should need less time off work to recover.
What is the downside of health and safety law?
+Following health and safety law can be expensive - eg. paying for staff to go on safety courses.
What can not following health and safety laws lead to?
+Businesses that don’t follow health and safety laws can be prosecuted, fined and even closed down.
+They may also have to pay compensation to anyone who’s injured, and could get bad publicity.
What are there laws restricting?
+There are las restricting how firms sell their products - the aim is to protect the consumer.
+If these laws weren’t in place, some businesses might be tempted to be a bit dishonest.
What do the consumer rights act set conditions for?
+The consumer rights act sets conditions for products
What do the consumer rights act 2015 cover?
+The Consumer Rights Act 2015 covers how goods and services can be sold.
+It basically states that goods should meet three criteria:
- The product should be fit for its purpose
- The product should match its description
- The product should be of satisfactory quality
Consumer Rights Act 2015
How can the product be fit for its purpose?
+The product has to do the job it was designed for - if you buy a bucket, say, it’s not much use if it leaks water out of the bottom.
Consumer Rights Act 2015
How can the product match its description?
+The way a business describes a product it’s selling is called ‘trade description’ - it’s illegal for a retailer to give a false trade description.
+This includes the size or quantity of the product, the materials it’s made from, and its properties.
+It’s also illegal to claim that a product has been endorsed or approved by a person or organisation unless it really has been.
Consumer Rights Act 2015
How can the product be of satisfactory quality?
+This means that the product should be well made - it shouldn’t fall apart after a couple of uses.
+It also means that it shouldn’t cause other problems for the buyer - eg. a fridge should keep food cold, but it shouldn’t make a noise like a jet plane at the same time.
What happens if products don’t meet the legal requirements?
+If products don’t meet legal requirements, customers can ask for their money back, a repair or a replacement.
What do consumer laws affect?
+Consumer laws affect businesses
What happens if a business breaks consumer law?
+If a business breaks consumer law it is faced with the cost and inconvenience of having to refund the customer, or repair or replace their item.
+The case could even end up in court if the customer is unhappy with the business’s response about their item [which cost the business even more if the customer wins the case].
As well as being expensive, what can breaking consumer law also lead to for a business?
+As well as being expensive, breaking consumer law can harm the reputation of the business, which could lead to a reduction in sales.
+So businesses have to be very careful when selling products and services to their customers.
+They need to make sure they train their staff properly, so they sell products accurately and understand what a customer’s rights are if they are unhappy with a product.
Regarding law, what do all firms need to keep up to date with?
+Firms need to make sure they keep up to date with all legislation that they need to follow - any changes to the legislation could mean that they need to make changes to their business.
+For example, a change to consumer law could mean that they have to rewrite any terms and conditions they give to customers and retrain their staff.
What can the economic climate have a hige effect on?
+The economic climate can have a huge effect on firms, but it’s something that they can’t control.
+The economic climate includes many different economic conditions - like unemployment and taxes.
What is the issue with unemployment?
+Unemployment is a big problem
When are people unemployed?
+People are unemployed when they’re able to work but can’t find a job.
What does the level of employment do?
+The level of employment [the number of people in work] changes over time, and this can have a big effect on businesses.
What does unemployment result in?
+Unemployment means the economy as a whole produces less output than if everyone was employed.
+So everyone suffers from unemployment - in theory at least.
+UK unemployment was very high in 2010 [around 2.5 million] - In 2016 this had fallen to about 1.6 million.
How can firms benefit from unemployment?
+Some firms can actually benefit from unemployment - they may be able to pay lower wages if there are lots of unemployed people desperate for a job.
+It can also mean they can fill jobs easily.
+In areas of high unemployment, the government may even give grants to firms who open and provide jobs in the area - these factors may encourage a firm to grow when unemployment is high.
What are the drawbacks for businesses if there are high levels of unemployment?
+There can also be big problems for businesses when there are high levels of unemployment.
+Less employment means lots of people have less disposable income - this can lead to a lack of demand for products, so sales fall.
+A firm may respond by eg. reducing prices, reducing output or making staff redundant.
What is disposable income?
+Disposable income is the money that people have left once they have paid tax.
Why might unemployment also be a problem for firms?
+It may also be a problem if firms hire people who have been unemployed for a while - people may lose skills while they’re unemployed, so firms may need to retrain them.
Give a business example of how unemployment can affect a firm?
+DV Murray is a small construction firm in the UK - the recession in 2008 meant that the firm had to make many of its construction workers redundant.
+In 2014, the growth of the economy meant that DV Murray took on many new contracts and needed to recruit more workers.
+Many of the workers it recruited had not worked in the construction industry since 2008, so DV Murray had to spend time and money on retraining these staff.
What is Tax?
+Tax is Money that goes to the government
What do both businesses and consumers have to pay?
+Both consumers and businesses have to pay tax.
+For example, consumers have to pay tax on money they earn [called income tax].
+Businesses have to pay tax on their profits - they also have to pay other taxes, such as environmental tax on activities that harm the environment, and tax on premises they own.
Who are tax rates set by?
+Tax rates are set by the government - changes to tax rates can have a big impact on businesses.
How can changes in income tax affect businesses?
+If the amount of income tax that consumers need to pay falls, they will have more disposable income.
+This means that consumer spending is likely to increase, leading to increased revenue for firms.
+The opposite is true if income tax increases - consumer spending is likely to fall which can negatively affect businesses.
How can changes in corporation tax affect businesses?
+If the amount of tax that a business needs to pay increases, it reduces the amount of money they have availible to reinvest - this can lead to slow growth for a business.
How can changes in environmental tax affect a business?
+If environmental tax increases, a firm may try to be more environmentally-friendly to avoid paying extra tax, [eg. by recycling more].
+But the tax increases may force the firm to find ways to cut costs in order to survive or meet their profit targets [eg. by making staff redundant].
+They may also consider relocating the business abroad to a country where businesses pay less tax.
What happens if the government reduce tax a business has to pay?
+If the government reduce taxes a business has to pay, it means the business will have more money availible to reinvest - this can help businesses to grow.
+However, lower business taxes might encourage firms from abroad to set up in the UK - this increases competition in the market and may lead to a fall in sales for UK businesses if they don’t compete well.
What are two other economic conditions that are always changing?
Prices and incomes
What is inflation?
+Inflation is an increase in the price of goods and services.
What do the price of goods and services do over time?
+In general, the price of goods and services inflates [goes up] over time.
+The prices of hundreds of products that an average UK household would buy is regularly tracked.
+The percentage increase in the price of these products over time is used to measure the rate of inflation.
What effect can inflation have on businesses?
+Inflation can have many different effects on a business.
+For example:
- Consumer Spending
- Cost of labour
- Global competition
How can inflation affect consumer spending?
+When inflation rises, consumer spending is likely to go up in the short-term - people rush to buy more products before prices go up even more.
+This creates extra revenue for a business, which can lead to higher profits [depending on how much the increase in inflation has affected its costs].
+However, if wages don’t go up at the same rate as inflation, demand for products can start to fall.
How can inflation affect the cost of labour?
+With high inflation, employees can put pressure on employers to increase wages so that they can afford the higher prices being charged for the things they need.
+This can increase a business’s costs and reduce its profits.
How can inflation affect global competition?
+A high inflation rate makes UK exports [products sold to other countries] expensive, so UK firms become less competitive globally.
+This means that a firm that sells lots of exports may see its sales fall,
+However, when inflation is low, sales of exports are likely to increase.
What happens to business growth when inflation is high?
+When inflation is high, business growth tends to be low.
+Businesses find it hard to predict what is going to happen to their sales and costs - this can make them reluctant to take risks and invest in their business.
What can changes in income affect?
+Changes in income can affect businesses
What happens to the amount of money people earn over time?
+Over time, the amount that people earn [their income] increases.
+However, incomes don’t necessarily change at the same rate as inflation.
What happens when income rises at a slower rate than inflation?
- People will have to spend a greater proportion of their income on things they really need - such as food.
- So they’ll have less money left to spend on luxuries, such as going to the cinema, or buying new shoes - the demand for these products will go down.
- This means businesses that provide luxuries will suffer - their sales are likely to go down, leading to lower profits. [They could lower their prices or spend more on advertising to increase demand again, but this is still likely to lead to lower profits]
Which businesses will benefit if people’s incomes are relatively low?
+However, some businesses will benefit if people’s incomes are relatively low.
+Stores selling goods at discount prices are likely to see sales go up as more customers will be making an effort to buy things as cheaply as they can.
What is ‘real terms’?
+If inflation is rising at a faster rate than income, income is said to be going down in ‘real terms’.
What happens when income rises at a faster rate than inflation?
- People will be spending a smaller proportion of their income on things they need - this means they’ll have more money to spend on luxuries, and the demand for these goods and services will go up.
- Businesses providing luxuries will see an increase in sales and their profits are likely to increase.
- Stores selling goods at discount prices may see their sales and profit go down as people start worrying less about getting things for the cheapest possible price.
What are interest rates?
+Many businesses and consumers will borrow money at some point.
+The amount of money they have to pay back depends on the interest rate.
What is interest added to?
+Interest is added to loans and savings
When you borrow money, what do you usually have to do afterwards?
+When you borrow money, you usually have to pay it back with interest - this means that you pay back more than you borrowed.
What happens if you save money?
+If you save money, you earn interest - the amount of money in your savings account will increase over time.
What will the amount of interest you pay or earn depend on?
+The amount of interest you pay or earn depends on the interest rate - it’s usually given as a percentage.
+The higher the interest rate, the more you pay or earn.
+In the UK, the Bank of England sets the base rate of interest - most other interest rates are linked to this - the base rate fluctuates [goes up and down] depending on how good the economy is.
What do low interest rates lead to?
+Low interest rates lead to increased spending
What happens when the interest rate is cut?
+When the interest rate is cut, it’s cheaper to borrow money.
+But you get less interest when you save money at a bank.
What happens when interest rate are low?
+When rates are low, firms and consumers borrow more and save less.
+Customers have more money to spend, so demand for goods and services go up.
+This means that firms are likely to make more profit and may need to increase output.
How does low interest rates affect firms borrowing money?
+Firms that borrow money to finance their spending [eg. by using overdrafts and loans] will have smaller interest repayments, so they have more money availible to spend on other parts of the business.
+They may also choose to borrow more while interest rates are low, eg. if they want to grow the business.
What do high interest rates lead to?
+High interest rates lead to decreased spending
What effect does increases in interest rates have?
+Increases in interest rates have the opposite effect to cuts - borrowing money becomes more expensive, but savers get better returns on their investments.
How will firms and consumers be affected due to increases in interest rates?
- Firms and consumers will have less money availible to spend - they’ll be paying higher rates on money they’ve borrowed; They’re also likely to be trying to save more, in order to take advantage of higher returns.
- This reduces demand for products, so firms often sell less and their profits may go down.
- It may also mean that firms can’t afford to pay everyone who works for them - so some people may be made redundant, and unemployment may go up.
What do exchange rates tell you?
+Exchange rates are the final economic condition you need to know about.
+Exchange rates tell you how currencies compare.
+They’re really important for firms that buy from or sell to other countries.
What do exchange rates convert between?
+Exchange rates convert between currencies
What happens if a company wants to import products?
+If a company wants to import products, they’ll have to pay for the product in the currency of the country it was made in.
+For example, if a British firm is importing goods from the US, they’ll have to pay for them in dollars, rather than in pounds.
What is an exchange rate?
An exchange rate is the price at which one currency can be traded for another.
How are exchange rates affected?
+Exchange rates are affected by the economy of the country that uses the currency, and by the global economy.
+This means they can change over time.
What does importing and exporting mean?
+Importing means buying goods from another country.
+Exporting means selling goods to another country.
What happened when the UK voted to leave the European Union?
- In June 2016, the UK voted to leave the European Union.
- This created a lot of uncertainty about what would happen to the UK economy.
- As a result, the value of the pound dropped overnight.
- The day before the result was announced, £1 was worth $1.48 - After the result was announced, £1 was worth just $1.36.
Who is a weak pound good for and bad for?
+A weak pound is good for exporters, bad for importers
What happens if the value of the pound decreases?
+If the value of the pound decreases, you’ll be able to buy fewer dollars [or other currency] for the same price as before.
+Pounds are cheaper, so British exports become less expensive abroad - resulting in more sales and higher profits for British firms that export products to other countries.
What does a weak pound also make it more expensive for?
+The weak pound also makes it more expensive for foreign firms to sell their products in the UK - that’s good news for British firms that compete with goods imported from abroad - they won’t have to reduce their prices so much to stay competitive.
+But its bad news for British firms that use imported raw materials - these are now more expensive so the production costs of these firms are higher - they’ll need to increase the price they sell their products for to cover their costs, which could cause their sales and profits to go down.
+The result is that the UK will have more exports and fewer imports.
Who is a strong pound good for and bad for?
+A strong pound is bad for exporters, good for importers.
What does an increase in the value of the pound mean?
+An increase in the value of the pound makes exports more expensive and imports cheaper.
+British that export products to other countries are likely to see their sales and profits go down - their products will be more expensive so fewer people will buy them.
+They may decide to move part of their business abroad so they can trade in the currency of the country where they sell their products, meaning they will be less affected by the exchange rate.
+British firms that import raw materials will be able to make products more cheaply, so their profits may go up.
What is SPICED?
- Strong
- Pound
- Imports
- Cheaper
- Exports
- Dearer
What is WPIDEC?
- Weak
- Pound
- Imports
- Dearer
- Exports
- Cheaper
Give an example of how exchange rates can affect the cost of importing and exporting.
- If £1 = $1.50, a British cricket ball that costs £5 will sell in the US for 5x1.50 = $7.50.
- And a baseball that cost $6 in the US can be sold for 6 ÷ 1.50 = £4 in the UK.
- If the value of the pound falls so that £1 = $1.30 the £5 cricket ball would sell in the US for 5x1.30 = $6.50.
- The $6 baseball can now be sold in the UK for 6 ÷ 1.30 = $4.62.
