2.5 external influences Flashcards
inflation definition and how to measure it
- ‘the general rise in prices in an economy over time’
- CPI (consumer price index) measures monthly changes in prices - calculates the rate of inflation
problems caused by inflation for a business
- COSTS RISE - higher wages, ££ raw materials, ££ fixed costs eg electricity & water etc.
- HIGHER LOANS - interest rates rise
- CONSUMER CHANGE SPENDING HABITS - less ££ purchases made
- INTERNATIONAL COMPETITIVENESS - lose sales to less inflated countries
- UNCERTAINITY - businesses cant predict prices even in short term, survival becomes a key objective
whats an exchange rate and why do they change
the rate the value of one currency expressed in terms of another.
they fluctuate bc:
1. changing demand for a currency
2. economic growth
3. changes to interest rates
whats the effect of increasing the value of a £ (appreciation)
EXPORTING BUSINESS
- sales will fall bc overseas r cheaper than uk
- therefor prices may need to be lowered
IMPORTING BUSINESS
- costs will fall bc suppliers overseas r cheaper
- therefore the business wil expand their pool of overseas suppliers
whats the effect of decreasing the value of a £ (depreciation)
EXPORTING BUSINESS
- sales will rise bc cheaper than overseas competitors
- they could increase their selling price to increase profit margins
IMPORTING BUSINESS
- costs will rise bc suppliers overseas will b more expensive
whats an interest rate
the % reward offered for saving money and the % charged for borrowing money
whats the effect of changing interest rates
- if IR rise, businesses pay more on new or variable rate borrowing –> costs rise
- therefore businesses make less capital investments (physical assets) - spend on more useful things like saving schemes
- customers buy less goods on credit - sales fall
- exporting businesses demand for products falls –> their products more ££ abroad
what are direct and indirect taxes
direct - taxes on income eg income tax, corporation tax
indirect - taxes on spending eg VAT
the impacts of increased taxation
- revenue - reduces disposable income for consumers so they buy less and demand falls
- costs - operating costs will rise, importing costs will rise - lower profit margins
- business decisions - less spending and investments by businesses. may relocate, cut employees etc
examples of reductions of UK government spending
- HS2 has been largely reduced - Leeds and Manchester now wont benefit
what does a business cycle show
- describes the upturns and downturns (booms and recessions) pin the level of a country’s economic activity or GDP over time
whats a boom and recession definitions
boom - period when the economy experiences HIGH RATES OF ECONOMIC GROWTH
recession - when the economy experiences 2 consecutive quarters (6 months) or more of NEGATIVE ECONOMIC GROWTH
recession characteristics and impact on businesses
CHARACTERISTICS
- high unemployment
- low confidence for firm s
- low inflation (deflation)
- increase in government expenditure
IMPACT ON BUSINESSES
- consumers less disposable income, less buying, less revenue for businesses
- easier to recruit ppl - lots of cuts from other businesses
- delay spending decisions - focus on survival
- production levels reduced
-
boom characteristics and impact on businesses
CHARACTERISTICS
- less unemployment, more jobs available
- high confidence - more risky decision-making
- increasing rate of inflation
- better gov budget bc tax revenues are higher
IMPACT ON BUSINESSES
- consumers disposable income increases –> higher sales revenues
- recruitment harder bc businesses have to pay higher wages
- businesses look to expand and max profits
- product and market development strategies put into place
- interest rates rise
whats the effect of economic uncertainty on the business environment
- happens when its hard to predict levels of supply and demand in an economy
- planning difficult –> make less risky, large decisions
- makes exchange rates fluctuate
- businesses can prep for times like this by - cash reserves
