Paper 1- Theme 2.5- External Influences Flashcards
define economic influences
how the changes in a country’s economy affect a business
in terms of
- inflation
- exchange rates
- taxation and government spending
- the business cycle
define inflation
general increase in the general price level
how is inflation calculated
using the Consumer Prices Index
-measured by the annual % change in consumer pricing of the most commonly purchased goods
how does inflation changes affect businesses
- increase price of supply and wages
- increases price of product
- can become less globally competitive
- real value of money borrowed reduces
√ impact and X impact of high inflation on businesses
√ - debt finance is cheaper, as true value of debt is eroded
√ - encourages investment, as retained earnings lose value
√ - encourages customers to buy now rather than wait
X - cost of supply and wages increases X - reduced global competitiveness as higher prices forced, in order for businesses to maintain profit margins X - usually leads to interest rate rise X - reduces purchasing power of money ----> less consumer disposable income ----> retained earnings lose value
define boom
define recession
boom - a period of increased commercial activity in the economy, where key indicators (e.g. GDP will rise)
recession - a period of general decline in economic activity, and drop in consumer spending
effect of boom on businesses
- higher consumer spending (rise in demand)
- low unemployment (lower pool of labour)
- business and shareholder confidence higher, more likely to make investment
effect of recession on businesses
opposite to boom
- less disposable income and consumer spending
- higher unemployment
- less business confidence
define taxation
charge levied by a government to raise revenue
define direct and indirect taxation
• both part of what policy
direct- tax on profits or income
indirect- tax on goods/services (VAT)
• fiscal policy
effect of taxation on businesses
- higher corporation tax leaves businesses with lower net profits
- higher income tax reduces consumer spending
- higher VAT reduces profit margin or increases price of product (depends whether businesses absorb the tax increase)
define fiscal policy
way government can control demand by increasing or decreasing taxes or government spending
define monetary policy
way government can control demand by increasing or decreasing interest rates
define interest rates
- the reward a central bank sets for saving and cost set for borrowing
impact of increased interest rates on businesses
businesses are DISADVANTAGED
- less consumer borrowing, more saving so less spending
- amount consumed must pay on loans and credit cards increases so less spending
- costs of repayment rise, so less business borrowing, so investment reduced
however
√ retained earnings can be saved and worth more
√ decreased business and consumer confidence may lead to higher barriers to entry
rising interest rates lead to the ……… of inflation
rising interest rates leads to the slowing down of inflation
define exchange rates
the price of one currency in the terms of another
impact of strong exchange rates
• imports cheaper (can import goods or supplies at lower price)
—-> also repatriating profits worth less
• exports dearer (export products to countries at a higher price (in their market)
—> less globally competitive OR increase sales revenue
define government spending
spending by the public sector on goods and services
e.g. on education, health care and defence
impact of increased government spending
• increased spending may leave to increased taxes (to levy it)
—> reduces consumer spending, company profit margins
• capital spending on new infrastructure may benefit distribution
•increase skills of labour force, through education investments
—> increase productivity —> improve BoP —> appreciate exchange rate
•healthcare investment improves quality of life
—-> higher motivation –> more productive
• may attract increased competition
define risk
define uncertainty
risk is calculated probability that a situation will not pan out as predicted
uncertainty is when businesses are unable to predict external shocks or future events
economic influences that are prone to uncertainty
- exchange rate changes
- interest rate fluctuations
- rate of economic growth
- price of oil and energy
what is the macro economic environment
trends in GDP, inflation, interest rates and exchange rates
- to ensure predicting the economic environment with certainty, businesses look at these trends and make prediction based off them
define legislation
laws passed by the parliament in the UK that affect businesses, ensure they behave in the right way
