2.5 - External influences Flashcards
What are interest rates?
Interest rates tell you the cost of borrowing or the return on savings.
The interest rate for borrowing money is the money charged for doing so, its calculated as a percentage of the amount borrowed
The interest rate on savings is the amount of money paid into a savings account by the bank, based on how much the customer has saved in the account.
What can interest rates affect?
Changes in interest rates will affect a business’s costs if it has a loan or mortgage.
Interest rates also affect consumer spending, and therefore businesses. High interest rates mean consumers have less to spend.
What is inflation?
Inflation is an overall increase in the price of goods and services within an economy.
What are the 2 types of inflation?
- Demand pull inflation
- Cost push inflation
What is demand pull inflation?
Demand pull inflation is when there is too much demand (more than the economy can supply).
It happens when there’s an increase in disposable income so people buy more and business’s cant supply goods quickly enough so they increase their prices
What is cost push inflation?
Cost push inflation is when rising costs push up prices.
Employee wage uses can make prices go up.
Cost push inflation can make profit margins go down if businesses decide not to put up their prices.
What is the rate of inflation?
The rate of inflation is the percentage change in the price of goods and services within an economy, in one year compared to another.
What is deflation?
Deflation is an overall decrease in the price of goods and services within an economy.
It is the opposite of inflation, there’s not enough demand so businesses reduce their prices.
Deflation causes a decrease in productivity because businesses wont keep endlessly supplying the market with goods that nobody wants.
How can inflation be tracked?
Inflation can be tracked using the consumer prices index.
It uses index numbers to track the changes in the average cost of hundreds of goods and services that an average household would regularly buy.
A line going up in the index shows inflation and a line going down shows deflation.
How do you work out the index number?
Index number = average value of the basket / base value of the basket x 100
How does inflation affect business strategy?
Businesses producing premium goods are the most likely to be affected by inflation because if customers have less to spend.
Periods of high inflation can be a good time to expand since its cheaper to borrow money.
Its hard for a business to plan when inflation is high, since it needs stable prices to make accurate forecasts.
What is an exchange rate?
An exchange rate is the value of one currency in terms of another currency.
What does it mean if a currency has appreciated or depreciated in exhange rates?
£1 might be worth $1.20, if it changes so that £1 is worth $1.60 then the pound has appreciated against the dollar.
The pound depreciates against the dollar if the amount of dollars falls.
How can an increased exchange rate affect the price of products?
- When the exhchange rate increases uk exports become more expensive abroad, meaning UK exporters might have to lower their prices to make sales
- An increase in the exchange rate is good for UK importers because imports become cheaper, leading to higher profits.
How can a decreased exchange rate affect the price of products?
- When the exchange rate decreases uk exports become cheaper for other countries, meaning uk exporters will have more demand or they can increase their prices
- A decrease in the exchange rate is bad for UK importers because imports become more expensive
How do you convert between currencies?
To convert from the single unit currency to the other, you need to multiply by the exchange rate.
e.g. using an exchange rate of $1.41 to £1, convert £47 to dollars
£47 x 1.41 = $66.27
What is a currency index?
You can use a currency index to compare the exchange rates for two different currencies.
Each currency will have a different base rate, but using currency indicies means that they will both change in relation to a starting value of 100.
How do you calculate the currency index number?
Currency index number = exchange rate / base exchange rate x 100
How can the government affect the economy?
- Government spending - this is when the government spends on things like social services, health and education pumps money into the economy. Changes in government spending affect firms within the economy controlled by that government.
- Taxation rates - high tax rates for individuals reduces consumers disposable income to spend, and businesses are taxed on profits.
What is a business cycle diagram?
A busienss cycle diagram shows changes in the economy.
- In a boom gdp is high as production reaches maximum capacity
- In a recession incomes start to go down and demand goes down
- In a slump gdp is at a low and businesses close factories and there are lots of redundancies
- In a recovery period production and employment increases
How do changes in the business cycle affect businesses?
- During booms businesses can raise prices, which increases profitability and slows down demand
- During recessions businesses may make workers redundant to save wage costs and increase capacity utilisation
- During a local recession businesses can market their goods elsewhere in the country
- Glowbal upswings provide growth opportunities for everyone
- Global recessions are bad for everyone
What is a microeconomy and macroeconomy?
- A microeconomy is a part of the economy that consists only of the individual consumers and firms that make up a specific market
- The macroeconomy is the economy as a whole (including all businesses and consumers)
How can microeconomy and macroeconomy uncertainty affect the business environment?
- A new competitor entering a market that a business is in can lead to uncertainty over the number of customers that the original business will have in the future
- a shortage in rarw material can lead to an uncertainty for a business that needs it
How does the law protect customers and consumers?
- The trade descriptions act
- sale of goods act
- consumer rights act
- data protection act
