2.5 external influences Flashcards
what does GDP stand for?
gross domestic product
what is GDP?
a measure of a country’s total output of goods and services over a period of time
how are GDP changes over time represented?
the business cycle
what are the different descriptors for levels of gdp?
peak = high level of GDP
trough = low level of GDP
expansion = increase in GDP
contraction = decrease in GDP
stages in the business cycle:
-boom
-recession
-slump
-recovery
what is a boom?
high rates of economic growth and production
features of a boom:
-high profits
-low unemployment
-high inflation
-shortages in supply
-high confidence
the impact of low unemployment in a boom:
-disposable income increases → higher sales revenue
-recruitment and staff retention may become more challenging, businesses may need to pay higher wages
the impact of high confidence in a boom:
-businesses look to expand and maximise profit
-production levels are likely to be increased
the impact of high inflation in a boom:
interest rates rise
what is a recession?
output starts to fall & growth declines
features of a recession:
-production declines as demand falls
-governments use policies to stimulate growth
-consumer/business confidence starts to fall
-high unemployment
the impact of high unemployment in a recession:
-customers have less disposable income and are likely to reduce spending
-businesses may find it relatively easy to recruit workers due to a larger pool of candidates
the impact of low confidence in a recession:
-businesses may delay spending decisions and focus on reducing risk
-production levels are likely to be reduced
-businesses will stockpile products
what is a slump?
a prolonged period of economic decline
features of a slump:
-high levels of unemployment
-high rates of business failure/closure
-low interest rates
-low levels of spending and investment
impacts of high rates of business failure during a slump:
-businesses adopt a strategy of rationalisation
-redundancies, scale down of production and reduction in capacity.
-businesses reduce prices and focus on their most profitable product lines
what is recovery?
economy starts to pick up after a period of decline
what is exchange rate?
the price of one currency expressed in terms of another
why are exchange rates important for businesses?
-important for businesses that import raw materials and components
-important for businesses that export their products
(a UK business will purchase a foreign currency in order to buy products and services from overseas)
why do exchange rates fluctuate?
-changing demand for a currency
-economic growth
-changes to interest rates
what happens if the pound increases in value against other currencies?
it strengthens
(one pound can buy MORE of the currency)
what happens if the pound decreases in value against other currencies?
it weakens
(one pound can buy less of the currency)
what is the impact on exporting businesses when the currency appreciates?
-sales are likely to fall as products become more expensive when compared to overseas competitors
-in order to remain competitive exporting businesses may need to lower prices and accept lower profit margins
what is the impact on importing businesses when the currency appreciates?
-costs are likely to fall as supplies from overseas become cheaper when compared to those domestically-produced
what is the impact on exporting businesses when the currency depreciates?
-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
what is the impact on importing businesses when the currency depreciates?
-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
what is inflation?
the general rise in prices in an economy over time
how is inflation measured?
by the consumer price index (CPI)
is low or high inflation more manageable for a business?
-low rate of inflation, as it can be managed by businesses
-a high rate of inflation will increase costs and reduce demand
what is the CPI?
it measures monthly changes in the prices of a range of goods and services and compares these changes to earlier periods, calculating the rate of inflation
what is deflation?
a decrease in the general price level of goods and services
what are the impacts of deflation?
-businesses may struggle to pay debts - assets may have to be sold to pay off debts
-low demand may lead to redundancies
what are the impacts of low inflation?
-businesses feel confident in a stable economic environment
-businesses may look to invest and grow
5 issues caused by inflation:
-increased costs
-higher repayments on loans
-consumers change spending habits
-international competitiveness reduces
-uncertainty
issues caused by inflation: increased costs
-workers often demand higher wages to compensate for the increase in the cost of living
-suppliers increase the cost of raw materials and components
-utilities become more expensive
-businesses may have to increase prices
issues caused by inflation: higher repayments on loans
borrowing is more expensive
issues caused by inflation: consumers change spending habits
-deters consumers from making significant purchases
-may reduce demand for usual lower priced wants too
issues caused by inflation: international competitiveness reduces
-domestic inflation rates are higher than those in other countries
-UK businesses are less likely to be competitive and lose sales
-imports of overseas competitors are likely cheaper than domestic goods
issues caused by inflation: uncertainty
-occurs when businesses cannot predict prices even in the short term
-survival may need to become the key business objective until stability returns
what is the interest rate?
a percentage reward offered for saving money and the percentage charged for borrowing money
impact of high interest rates on business activity:
-business spending falls
-inflation falls
-stronger £
-less demand overseas
impact of low interest rates on consumer & business activity:
-consumer and business spending rises
-inflation may rise
-weaker £
government spending and taxation is a means of…
controlling economic activity
what is the budget balance?
the difference between government income (mainly taxes) and expenditure in a fiscal year
what two types of tax do the government impose?
direct and indirect
what are direct taxes?
levied on income
what are indirect taxes?
levied on spending (eg: VAT)
what does expansionary policy do?
reduces direct and indirect tax to increase disposable income
(Iincreases borrowing)
what does contractionary policy do?
increases direct and indirect taxes to slow down growth
examples of government expenditure:
infrastructure, human capital, goods, services
impact of an increase in taxation on revenue:
disposable income will decrease →
demand for products may fall →
revenue may fall for businesses
increased VAT will make products more expensive → customers may switch to alternative products
impact of an increase in taxation on costs:
-operating costs will rise → charge higher prices → lower sales & profit
when does economic uncertainty occur?
when it is difficult to forecast the level of supply and demand in an economy
what will change about businesses due to economic uncertainty?
-planning will be difficult
-they will be reluctant to make significant decisions (especially about capital expenditure)
how can businesses be ready for economic uncertainty?
-building up cash reserves when times are good
-keeping informed about the economic climate
-being ready to take advantage of opportunities when they arise
define legislation:
laws and regulations passed by governments that require businesses and individuals to conduct their behaviour in a particular manner
five areas of legislation that have significant impacts on businesses:
-consumer protection
-employee protection
-environmental protection
-competition policy
-health and safety
what does consumer protection aim for?
ensure that consumers are treated fairly by the companies they buy from
what areas does customer protection cover?
-the safety of products
-the standard and quality of products
-the rights of customers if they are unhappy with their purchase
-the product information that must be given to customers
downsides of customer protection:
meeting the legislation results in increased business expenditure, which may reduce profitability
what does employee protection aim for?
to prevent the exploitation of workers
what areas does employee protection aim cover?
-pay and working conditions
-equality of employment rights for marginalised groups (e.g. those with disabilities) to avoid discrimination
-the right to belong to a trade union and take industrial action
-contracts and termination of employment
what are the 4 impacts of employee protection legislation on businesses?
-changing working practices
-compliance costs
-potential penalties
-rewards through workforce
-higher labour costs
impacts of employee protection legislation: changing working practices
-recruitment and selection procedures require regular review to avoid unlawful or discriminative practice
-working conditions may need to improve
impacts of employee protection legislation: compliance costs
-frequent training & specialist HR advice
-legal advice or representation
impacts of employee protection legislation: potential penalties
fines may be issued and the businesses reputation may be damaged if employment legislation is broken
impacts of employee protection legislation: rewards through workforce
businesses that operate legally are likely to have high staff retention, motivated and productive staff
impacts of employee protection legislation: higher labour costs
-business must ensure that workers receive the minimum wage
-safety equipment
-provision of rest breaks
what do environmental protection laws aim for?
to hold businesses responsible for their environmental impact
(making business pay for the full cost of cleaning up or repairing any damage to the environment caused by their production process)
which areas do environmental laws cover?
-pollution
-destruction of wildlife
-air quality
-resource depletion
what may happen if a business doesn’t follow environmental legislation?
they may be fined or forced to cease commercial activity until they resolve problems they have caused
what does competition legislation aim to do?
protect the interests of both consumers and businesses by restricting anti-competitive practices
what areas do competition legislation cover?
-cartel activity & collusion
-anti-competitive practices
-abuse of market power
what does health and safety legislation aim to cover?
tells businesses to operate in a way that protects the physical and mental wellbeing of its employees and contractors as well as its customers
what areas do health and safety legislation cover?
-adequate breaks
-temperature and noise levels
-safety equipment
-hygienic, safe and sanitary conditions
-preventing stress
the effects of a business following health and safety legislation:
financial and time costs:
-staff training and supervision
-changes to working hours and rest provisions
-arrangement of manuals, signage and safety documentation
-purchase and maintenance of safety equipment
consequences of not following health and safety legislation:
-fines
-investigation by the health and safety executive
-some cases can lead to prosecution
what is the competitive environment?
the degree to which a business is affected by rivals that operate in the same market
competition & response speed:
-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
determinants of competitiveness:
-the number and size of competitors in the market
-the pace of innovation
-the growth rate of the market
-the level of differentiation between competitors
positive impacts of competition on businesses:
-improved efficiency (to reduce average costs)
-a increased innovation
-wider product ranges
negative impacts of competition on businesses:
-a fall in prices (leading to lower profit margins)
-increased costs of promotion
how the size of the market affects competition:
-the level of competition is likely to be less in smaller markets, but this is not always the case
-small markets may have a limited population; therefore any two businesses can have significant rivalry
define market size:
the number of customers and sellers in a particular market
advantages of entering a small market:
advantages:
-less competition
-easier to get loyal customer
-the specialised knowledge or skills required may well limit the competition
-the higher costs of production may well put off new businesses from launching
disadvantages of entering a small market:
disadvantages:
-few economies of scale
-businesses may struggle to support a high volume of goods due to limited demand
advantages of entering a large market:
-wider customer base
-less volatility than smaller markets
disadvantages of entering a large market:
-competition from established businesses
-higher costs of promotion
-challenges in deciding their pricing strategy
