2.5.1 - Economic Influences

Question 1

Define Economic Influence?

Answer 1

• when a Business is Affected in any way by Economic Factors e.g. inflation, exchange rates

Question 2

State 5 Effects on Businesses of Changes in Economic Influences

Answer 2

• Inflation
• Exchange Rates
• Interest Rates
• Taxation and Government Spending
• Business Cycle
• Effect of Economic Uncertainty on the Business Environment

Question 3

Explain Effect on Business Changes in - INFLATION

Answer 3

• as Inflation Rises -> Cost of Products Rise , Cost of Supplies & Raw Materials will Go Up
• as Cost go Up due to Inflation -> Business Owners Need to Increase Prices to Maintain Profitability
• Profit Margins will be Squeeze

Question 4

Explain Effect on Business Changes in - EXCHANGE RATES

Answer 4

• Appreciation : Rise in Pound Against Other Currencies -> Strong Pound means Imports are Cheaper and Exports are Dearer (harder to sell)
• Depreciation : Fall in Pound -> Weak Imports , Strong Imports

Question 5

Explain Effect on Business Changes in - Interests Rates

Answer 5

• if Interest Rates Increases -> Consumer & Business Spending Decreases
• Lower IR Encourage Economic Growth and Fall in Unemployment
• if IR on Loan are Low, Consumer may Borrow to Buy a Car -> Stimulates Demand
• if IR go Up , Consumers Won’t Borrow
• IR Rising -> Cost of Borrowing Rises -> Cost of Supplies for Business Increase
• IR Falling -> Cost of Lending Falls -> Increase Profits

Question 6

Explain Effect on Business Changes in - TAXATION

Answer 6

• if Taxation Increases -> Costs of a Business Increase -> Reduce Profitability
• Lower Taxes -> More Demand in Economy -> Higher Output and Employment
• Higher Taxes -> Higher Cost for UK Business -> makes Less Competitive in Global Marketplace -> may mean Unemployment Rises as Business have to Lay Off Extra Staff Due to Reduction in Demand

Question 7

Explain Effect on Business Changes in - Business Cycle : BOOM

Answer 7

• period of High Consumer Spending -> Increased Demand for Goods and Services
• means Increase in Work, Lower Unemplyment and Higher Wages
• leads to More People in Work Able to Buy More Goods and Services

Question 8

Explain Effect on Business Changes in - Business Cycle : RECESSION

Answer 8

• Fall in Demand
• Consumers will demand Less Goods as they Save Money rather than Spend -> they Worry about Borrowing in Case IR goes Up
• Business Typically have to Make Redundancies to Lower Costs and will have Lower Profits as Demand Falls

Question 9

Explain Effect on Business Changes in - Business Cycle : SLUMP

Answer 9

• Bottom of Business Cycle
• Consumer Confidence & Spending is at Lowest
• Usually very Little Investment in Businesses and High Levels of Unemployment as Demand for Goods is at Lowest Level

Question 10

Explain Effect on Business Changes in - Business Cycle : RECOVERY

Answer 10

• Demand for Goods Start to Improve
• Unemployment Starts to Fall as Business Start to Take on Workers to Meet New Improving Demand
• Consumer Confidence Returns -> start to Buy Larger Items Agaian

Question 11

Explain Effect on Business Changes in - EFFECT OF ECONOMIC UNCERTAINTY

Answer 11

• Financial Shocks Since 2008 Recession have Meant there has Been Macroeconomic Uncertanity
• this Means with a Risk of Unemployment that Consumers are delaying the Purchase of Goods
• means Demand Falls for Goods and Services
• as a Result of Uncertainty -> Manfuctures are Reluctant to Expand and Grow -> Affects and Reduces Supply of Goods & Services