2.5 - External Influences

Question 1

What is inflation?

Answer 1

Inflation is the general rise in prices in an economy over time.

Question 2

What is the Consumer Price Index (CPI)?

Answer 2

It measures the monthly changes in the prices of a range of goods and services and compares these changes to earlier periods, calculating the rate of inflation.

Question 3

What are exchange rates?

Answer 3

The exchange rate is the value of one currency expressed in terms of another.

Question 3

What is an appreciation of the pound?

Answer 3

An increase in the value of the pound against other currencies.

Question 4

What is a depreciation of the pound?

Answer 4

A decrease in the value of the pound against other currencies.

Question 5

How will an appreciation of the pound affect businesses which export?

Answer 5

• Sales are likely to fall as products become more expensive when compared to overseas competitors.
• Prices may need to be lowered in order to remain competitive.

Question 6

How will an appreciation of the pound affect businesses which import?

Answer 6

• Costs are likely to fall as supplies from overseas become cheaper when compared to those domestically-produced.
• Businesses may seek to expand the pool of overseas suppliers to further reduce costs and maximise profits.

Question 7

How will a depreciation of the pound affect businesses which export?

Answer 7

• Sales are likely to rise as products become cheaper when compared to overseas competitors.
• Businesses may choose to increase selling prices to increase profit margins.

Question 8

How will a depreciation of the pound affect businesses which import?

Answer 8

• Costs are likely to rise as supplies from overseas become more expensive when compared to those domestically-produced.
• Businesses may seek domestic suppliers to reduce costs and maintain profit levels.

Question 9

What are interest rates?

Answer 9

The interest rate is the percentage charged for borrowing money and the percentage reward offered for saving money.

Question 10

How does a rise in interest rates affect businesses?

Answer 10

• If they rise, businesses will have to pay more on new or variable rate borrowing which will increase their costs.
• Businesses may be less willing to invest when their retained profit may be more profitably invested into savings schemes.
• Customers are less likely to purchase goods on credit when interest rates are high leading to a fall in sales.
• Exporting businesses may see demand fall for their products overseas as higher rates usually strengthen the pound and make their products more expensive abroad.

Question 11

What are direct taxes?

Answer 11

Direct taxes are levied on income e.g. income tax and corporation tax.

Question 12

What are indirect taxes?

Answer 12

Indirect taxes are levied on spending e.g. VAT.

Question 13

What is the impact of taxation on revenue?

Answer 13

• Revenue may fall for businesses as increased income tax will reduce the disposable income of consumers and so demand may fall. Also, increased VAT will make products more expensive and customers may switch to alternative products.

Question 14

What is the impact of taxation on costs?

Answer 14

• Operation costs will rise as a result of increased taxes such as VAT and NI contributions. These increased costs mat lead to higher prices for consumers and so lower sales and profits may fall.
• Import costs are increased also when customs duties are raised.

Question 15

What is the impact of taxation on business decision?

Answer 15

• Business spending an investment may be affected by increases in corporation tax as less profit is retained.
• Businesses may choose to forego business improvement or relocation.
• May take steps to avoid paying specific taxes or pay lower rates of taxation.

Question 16

What is a recession?

Answer 16

A recession occurs when an economy experiences two consecutive quarters or more of negative economic growth.

Question 17

What is a boom?

Answer 17

A boom is a period of time where an economy experiences increasing/high rates of economic growth.

Question 18

What are the characteristics of a recession?

Answer 18

• Increasing/high unemployment
• Low confidence for firms/households
• Low inflation or deflation
• Increase in government expenditure

Question 19

What are the characteristics of a boom?

Answer 19

• Decreasing unemployment + more vacancies
• High confidence and more risk taken
• Increasing rate of inflation
• Improvement in govt budget as tax revenue rises and expenditure falls

Question 20

What is economic uncertainty?

Answer 20

Economic certainty occurs when it is difficult to forecast the level of supply and demand in an economy.

Question 21

Why might economic uncertainty occur?

Answer 21

• Fluctuating exchange rate
• Economics growth uncertainty
• Turbulence in the price of key commodities such as oil

Question 22

How can businesses ensure they remain prepared for economic uncertainty?

Answer 22

• Building up cash reserves when times are good
• Keeping informed about the economic climate
• Being ready to take advantage of opportunities when they arise

Question 23

What does the consumer protection legislation state?

Answer 23

It aims to ensure consumers are treated fairly by the companies with which they interact. Products/Services must be:
* Fit for purpose
* Of satisfactory quality
* As described

Question 24

How do the consumer protection laws affect businesses?

Answer 24

• Meeting these requirements will result in increased expenditure
• May have to hire staff to ensure each factor is met

Question 25

What does the employee protection legislation state?

Answer 25

It aims to prevent the exploitation of workers. It covers:
* Pay and working conditions
* Equality of employment
* The right to be part of a union and to take action
* Contracts and termination of employment

Question 26

How do the employee protection laws affect businesses?

Answer 26

• Compliance costs
• Changing working practices
• Potential penalties (and rewards)
• Higher labour costs

Question 27

What does the environmental legislation state?

Answer 27

It aims to hold businesses responsible for their environmental impact. It covers:
* Pollution
* Destruction of wildlife
* Traffic congestion
* Air quality
* Resource depletion

Question 28

How do the environmental laws affect businesses?

Answer 28

• Businesses that fail to adhere to the laws may be fined or forced to cease commercial activity until the problems they have caused are resolved.

Question 29

What does the competition policy legislation state?

Answer 29

It aims to protect the interests of both consumers and businesses by restricting anti-competitive practices. It covers:
* Abuse of market power so as to limit monopoly power
* Anti-competitive acquisition activity
* Cartel activity and collusion

Question 30

How does the competition policy law affect businesses?

Answer 30

• The Competition and Markets Authority may potentially take steps such as preventing a merger or instructing a business to dispose of subsidiaries in order to correct the market.

Question 31

What does the health and safety legislation state?

Answer 31

It requires businesses to operate in a way that protects the physical and mental wellbeing of its employees and contractors as well as its customers. It covers:
* The provision of adequate breaks
* Temperature and noise levels
* The provision of safety equipment
* Hygienic, safe, and sanitary conditions
* Preventing stress

Question 32

How does the health and safety law affect businesses?

Answer 32

• Staff training and supervision
• Change to working hours and rest provisions
• Arrangement of manuals, signage, and safety documentation
• Purchase and maintenance of safety equipment
• Drawing up and implementing code of practice
• Serious health and safety breaches can lead to fines or investigation by the Health and Safety Executive and in some cases can lead to prosecution

Question 33

What is the degree and nature of competition?

Answer 33

• The competitive environment concerns the degree to which a business is affected by rivals that operate in the same market.
• The threat competition presents to businesses operating in a market will determine how quickly the business responds, - the greater the threat, the quicker the response required, and vice versa.
• Operating in a competitive market can have impacts on the marketing and operational strategy.

Question 34

What is market size?

Answer 34

Market size is the number of customers and sellers in a particular market.

Question 35

Why may market size be a problem for niche-market businesses?

Answer 35

Businesses entering these markets may struggle to support a high volume of goods due to limited demand as the market size is small. For these businesses, the specialised knowledge or skills required may well limit the competition and the higher costs of production may well put off new businesses from launching.

Question 36

Why may market size be a problem for mass-market businesses?

Answer 36

Businesses entering large markets may face more competition from established businesses, higher costs of promotion, and challenges in deciding their pricing strategy.