2.5.1 Economic Influences

Question 1

The effect on businesses of changing economic variables

Answer 1

• Businesses need to anticipate in response to changing economic variables in order to maximise their chances of success
• Inflation needs to be considered

Question 2

Inflation

Answer 2

• Inflation is a general rising prices in an economy overtime
• The consumer price index (CPI) measures monthly changes in the price of a range of goods and services and compares these changes to earlier period, calculating the rate of inflation

Question 3

Problems caused by inflation

Answer 3

1. Increased costs.
   - Workers often demand higher wages to compensate the increase in cost of living, suppliers increase the cost of raw materials in components, utilities such as electricity become more expensive
2. Higher repayment on loans.
   - Interest rates usually rise as the Bank of England uses the base rate as a tool to control inflation, making new and variable rate borrowing more expensive
3. Consumers change spending habits.
   - Deters consumers from making significant purchases and they may reduce demand for usual lower priced wants to (e.g. cinema tickets), purchasing on credit becomes more expensive
4. International competitiveness.
   - Where 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 to be cheaper than domestic goods
5. Uncertainty.
   - Occurs when businesses cannot predict prices even in the short term, survival may need to become the key business objective until stability returns, spending and contract decisions are likely to be delayed

Question 4

Changes in exchange rates

Answer 4

• Exchange rate is the value of one currency expressed in terms of another. Exchange rates are an important economic influence with businesses that import role materials and components and businesses the export their products.

Question 5

The impact on businesses of currency appreciation and appreciation

Answer 5

• Depreciation: a decrease in the value of the pound against other currencies
• The impact on exporting businesses: sales are likely to rise as the products become cheaper when compared to overseas competitors, businesses may choose to increase selling prices to increase profit margins
• The impact on importing businesses: cost are likely to rise of supplies from overseas become more expensive when compared to those domestically produced, businesses may seek domestic supplies to reduce costs and maintain profit levels
• Appreciation: an increase in the value of the pound against other currencies
• The impact on exporting businesses: 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
• The impact on importing businesses: costs likely to fall and supplies from overseas become cheaper when compared to those domestically produced, business Macy to expand the pool of overseas supplies to further reduce cost and maximise profits

Question 6

Changes in interest rate

Answer 6

• The interest rate is a percentage reward offered for saving money in the percentage charged for borrowing money
• If interest rate rise businesses will have to pay more on new or variable rate borrowing, which will increase their costs. Businesses may be less willing to make capital investments when they retain profit maybe more profitably invested into saving schemes
• Customers are less likely to purchase goods on credit when interest rates are high lead into a fallen sales. Exporting businesses may demand for their products overseas for as high interest rates usually strength from the value of the domestic currency make their products comparably more expensive abroad.

Question 7

Changes in taxation and government spending

Answer 7

• Governments impose direct and indirect taxes on businesses and household:
• Direct taxes are levied on income e.g. income tax and corporation tax
• Indirect taxes are levied on spending e.g. value added tax

Impact on revenue:
- Revenue may fall for many businesses, increased income tax will reduce the disposable income of customers and demand for products may fall, increased VAT will make products more expensive and customers may switch to alternative products

Impact on costs:
- Operating cost rise as a result of increased taxes such as VAT and national insurance contributions, higher cost may be offset by charging high prices, higher prices may lead to lower sales and profit May, import costs that increase when custom duties are raised

Impact on business decisions:
- Business spending an investment may be affected by increases in corporation taxes less profit will be retained to cover future expenses and make plans for business expansion
- Operational decisions may be affected by increases in business rates and taxes related to employing workers, businesses may choose to forgo business improvements or relocation, or employee fuel workers as a result of increase costs

Question 8

Recession

Answer 8

• Characteristics: increasing/high unemployment, low confidence for firms/household, low inflation or deflation, increase in government expenditure
• Impact on businesses:
• Customers have less suppose with income and unlikely to reduce spending or postpone significant spending decisions, leading to low revenue, businesses may find it relatively easy to recruit workers from a large pool of candidates, businesses may delay spending decisions and focus on reducing risk and survival

Question 9

Boom

Answer 9

• Characteristics: decreasing unemployment and increasing job vacancies, high confidence and more risky decisions taken, in increasing rate of inflation, and improvement in the government budget is tax revenue rising government expenditure falls
• Impact on businesses: customers disposable income increases leading to higher sales revenue, recruitment and staff retention may become more challenging and businesses may need to pay higher wages, businesses to expand a maximise profit

Question 10

The effective economic uncertainty on the business environment

Answer 10

• Economic uncertainty occurs when it’s difficult to level of supply and demand in an economy. Businesses will find planning difficult and are likely to be reluctant to make significant decisions, especially with regards to capital expenditure.
• Economic uncertainty may occur as a result of fluctuating exchange rate, economic growth, uncertainty, turbulence in the price of key commodity such as oil
• Businesses must always be prepared for economic uncertainty by building up cash reserves when times are good,, keeping informed by the economic climate, being ready to take advantage of opportunities when they arise