2.5.1 - Economic Influences

How is economic activity measured?

Gross Domestic Product (GDP)

The total value of a country’s output per yeat

What is Real GDP?

Considers inflation

Minuses inflation rate from GDP rate

What is inflation?

A general rise in prices or fall in value of money

What is the rate of inflation?

How prices have changed based on the same period a year earlier, so it is an indication of the cost of living changing

What are the ways of measuring inflation?

• Retail Price Index (RPI)

• Consumer Price Index (CPI)

What is retail price index?

A measurement of basket goods and services, representative of what people buy in the UK

What is consumer price index?

Similar to retail price index but excludes housing costs

What are the effects on businesses of rising inflation?

• If the price is inelastic, the price of higher inflation can be passed onto the consumer

• Some firms may reduce supply of a product which will affect operations management as capacity is reduced and the firm rationalises with a greater focus on cost minimisation

• If a firm exports, then it will see customers moving to companies abroad where prices are not rising as fast

What happens if the pound is high in value?

Importing firms will be able to buy cheaper raw materials and finished goods

Exporting firms will have less demand

What happens if the pound is low in value?

Greater demand from abroad for UK goods

Input prices will increase if raw materials are imported

If the firm has a price inelastic product it will be able to pass the increase in costs onto the consumer

What are interest rates?

The price of money, for example the cost of borrowing or the reward for saving

What is the effect on businesses of interest rate changes?

• If repayment amounts on loans on overdrafts increase then so will the business’ costs

• Investments will become more or less attractive, influencing a business’ ability to grow by investing in new capital equipment or larger premises

• Influences level of demand by consumers (high interest rates means consumers will save not spend)

• High interest rates means consumers have less disposable income and foreign investors will invest more into UK banks for higher returns and therefore an increase in demand for the pound will see its value appreciate

What is government spending?

The expenditure by the government on supplying goods and services to achieve economic and political objectives

What is the effect on businesses of government spending?

• Budgets allocated to public sector organisations can affect demand for these organisations

• Spending on infrastructure increases disposable income and therefore levels of demand

• Benefits will affect disposable income for recipients

• Pay rates to public sector workers will affect levels of disposable income

What is economic uncertainty?

Shocks are unpredictable events which can happen in the microeconomic environment (affecting the actions of individual consumers and suppliers) or in the macroeconomic environment (affecting the actions of the economy as a whole)