2.5.1 Economic Influences Flashcards
£1=$1.10 2018 to £1=$1.60 in 2019. Depreciation or appreciation
Appreciation, pound gets stronger
Why is a weak pound good
More price competitive in overseas markets. so charge less and still make the equivalent of a £.
importers biscuit manufacture does not export abroad but imports flour from America. Example of why weak pound is not good for importing
weak pound, less stock for each one of your British pounds. £1=$1.10 will only get 1.10 worth of flour for each pound but when £1=$1.60 and appreciates, get 1.60 worth of flour still just for £1
Depreciation
less foreign currency for each gb pound
What might a weak pound lead to if firms are not exporting
encourage firms to strategise seeking out foreign markets for growth instead of just domestic markets
What might a weak pound lead to if firms are already exporting
might want to maximise the amount of production they are producing for overseas markets as opposed to domestic markets. overseas growth and expansion strategy more attractive to businesses.
strong pound implications on an exporting business
concentrate more on domestic markets and foreign markets less attractive. refocus domestically.
think about profit margins- to remain price competitive in foreign markets, might have to settle for fact it has to make lower profit margins. If cant justify offsetting costs to consumers due to PED. might decisde to cost minimise in other area of business because profit margins being squeezed.
Importer strategies when there is a strong pound
stockpile or import more stock as get more for money.
Encourage more importing rather than domestic buying, foreigh suppliers become more competitive.
Weak pound implications for importing stock
less stock for our money from overseas suppiers so look inwardly at domestic suppliers or tweaking supply chain to get more stock from home. If reliant on foreign supplier wont be an option so need to look for strategies for cost minimisation- marketing, hr like training etc, lean production
Inflation
A sustained increase of prices inside an economy using CPI
When inflation rises too quickly, the relationship between price and services and income/ salaries.
People’s incomes not rising as rapidly as prices in economy so cant sustain same standards of living. High inflation/ prices rising faster than income= raw materials more expensive, energy prices, labour force. keep prices same due to price elasticity so profit margins squeezed or increae prices but risk damaging demand so may be drp off in sales volume, lower capacity utilisation, rivals so fall in market share, may affect EOS. Fall in demand during inflation especially for luxury goods
Effect of high inflation on labour
workers / trade unions demanding pay increases. have to agree , increasing labour costs or risk damaging industrial relations in their firms, damaging relation with employees, less loyalty more labour turnover
When inflation is high- what a business will do
may target new markets with more predictable and stable inflation rates. export more to these markets.
Business thinking about capital expenditure products and growth/ new factories/ facilities, inject indecision into decision-making. force through growth and invest now or cancel plans- willl demand continue to grow at a time consumer incomes are squeezed. demand dwindles. shelve plans until more certainty.
DEFLATION
fall in the price level in the economy.
not just a slow down in the rate of inflation e.g. 2016- 3%, 2017- 2%, 2018- 1% THIS is still inflation just a slow down in the rate that prices are rising by.
Effect of short term deflation
If short term, may have benefits. Lower prices so lower costs (production, cost of raw materials, bills, outgoings, energy). Keep selling price at same level then beneficial, short boost in profit margins.
Effect of long term, sustained deflation
impact on consumers negative for firms- consumers start to think about delaying their consumption decisions, buying next month rather than now because they envisage prices are going to fall. So firms will see falling levels of demand and sales as customers delay purchasing decisions, so will have to craft strategies and make decisions like reducing prices rapidly to appear so attactive that they make their purchasing decisions now, but profit marging fall, sales value and revenue will suffer. Firms may have to make peeripheral decisions about own costs, e.g. labour costs so conflict with workforces and workforce representatives.
Redundancies, rationalisation
workers may experience frozen income levels but debt preserved at same high level. this will effect purchasing decisions. Impact demand, sales volume, ability to experience EOS, revenue figures and dividents affected.
Effects of interest rates on businesses
C onsumers likely to have less money to spend as payments on mortgages or other borrowings will increase. This is likely to reduce demand.
- The amount paid in interest on borrowing by the business will rise, pushing up costs.
- Consumers are less likely to ‘borrow to buy’, so products that are often bought on credit, such as cars and sofas, will see demand fall, as credit will cost more.
- Businesses are less likely to invest as the opportunity cost of investment (keeping the money in the bank to earn interest with no rise) will be greater.
Taxation and government spending- fiscal policy
fiscal policy is the use of govt spending and tax to influence level of economic activity
economy as a balloon
gets smaller so put air in it and expand economy.
A budget surplus (if balloon getting close to popping)
take pressure out of economy and withdraw money by charging people and businesses more taxes. stops economy from expanding too quickly.
A budget deficit occurs when
the government injects more money into the econoy than it withdraws through taxation.
Direct taxes on income, which affect incentives to work:
Income tax- people
Corporation tax - businesses and profit
Indirect taxes are
taxes on spending. They affect production and consumption choices. VAT and duties like cigarrettes and alcohol.
Cutting Direct Taxes
Increases workers’ incentives to work as income taxes fall
- New workers enter workforce
- Workers are highly motivated (Taylor)
- Increases profitability as corporation taxes fall
- More incentive for new businesses to enter the market
- Increased incentives to invest and take risks
Cutting Indirect Taxes
- Falls in VAT reduce selling prices and should increase sales.
- Falls in costs of production encourage businesses to increase output.
Increase in Government Spending-
Welfare
Benefit the least well off- give them more money, will go out and spend it
Impact on businesses’ product portfolio and focus on those who are getting higher incomes due to increased welfare.
Increase in Government Spending- health
Healthier and more productive workforce
Increase in Government Spending- Education/ training
Increasingly skilled workforce- impact on training requirements. less training costs
Increase in Government Spending- defence
ancillory services, need sandwiches, uniform, equipment. Opportunities in support industries
Increase in Government Spending- Transport
May encourage investment in a new geographical area
Infrastructure
Reduced costs of production- better transport/roads/ internet etc.
