ch2-the external business environment

What’s an economy?

is about buying and selling goods and services for money.

It also measures all the goods and services produced. A business is affected by the economy it operates in.

There are two types of economies:

·         Local economy – within a small area or community

·         Global economy – across the world

Global economy-Macro-economic factors

UK businesses that sell goods abroad (exports) or buy goods from abroad (imports) are affected byit.

Things like interest rates, inflation, taxes, exchange rates, consumer income, and employment levels in other countries can affect how businesses trade — both globally and locally.

Interest rates

they are expressed as a percentage. The rate will determine how much savers receive and how much borrowers are charged.

Savers receive interest on their savers (for ex: from bank deposit accounts)

When interest rates go up (for example, from 2% to 4%), people and businesses are likely to save more.

When interest rates go down (for example, from 5% to 1%), people and businesses will save less.

Borrowers

are charged interest on amounts borrowed (for ex: from bank loans and mortgages)

If interest rates are high,

people and businesses will borrow less because loans (like mortgages) become more expensive.

If interest rates are low,

people and businesses will borrow more because loans are cheaper.

also called the Bank Rate.

In the UK, the Bank of England sets the interest rate

The Bank of England changes interest rates to help control inflation (the rise in prices).

• If inflation is high, it will raise interest rates to reduce spending.

• If inflation is low, it will lower interest rates to encourage more spending.

Inflation

means a general increase in the prices of goods and services. It is shown as a percentage (for example, 2.5%).

Inflation is measured by:

·         RPI (Retail Price Index) – measures changes in the cost of goods and services.

·         CPI (Consumer Price Index) – shows how the prices of a “basket” of common goods and services change over time.

High inflation .

means prices keep rising for many goods and services.
 If it is not controlled, people’s purchasing power (what their money can buy) goes down, which is bad for the economy.

When prices rise quickly, people’s purchasing power goes down, so they spend less. This can cause businesses to lose sales

When inflation is low

(around 1%–2%), prices stay stable, which is good for the economy.

deflation/ negative inflation

When inflation is below 0%, prices fall. .

Exchange rates

They show how much foreign money you can buy with one unit of your own currency.

Exchange rates change based on supply and demand in international currency markets.

If your currency is strong

imports (buying from other countries) become cheaper, but exports (selling abroad) become more expensive

If your currency is weak

exports become cheaper, but imports become more expensive.

When consumer income is high

people spend more, buying luxury goods and fewer basic items.

When consumer income is low.

people spend less, buying cheaper goods instead of luxury items

The UK government wants

consumer spending to stay high so the economy grows and businesses make more sales

Most economies go through a pattern called the economic cycle and the UK economy follows this too which includes

boom, slowdown, recession, and recovery

Boom means

The economy is growing, GDP is rising, and employment is high

Recession means

The economy shrinks, with GDP falling for two quarters in a row.

Recovery

means the economy starts improving and coming out of recession.

The levels of employment/unemployment .in an economy will

affect businesses in different ways

Low unemployment

is likely to lead to an increase in wage costs for businesses as employees demand higher salaries

High employment.

is good for the UK economy because many people have jobs

High unemployment

is bad and costly because the government has to pay benefits to those without work

Apprenticeships

Employers get financial help to hire apprentices and pay them the National Minimum Wage

Industrial placements .

A 45-day job for 16–19 year olds. Employers get financial incentives

Kickstart scheme

A 6-month work placement for 16–24 year olds. Employers receive extra funding for training and other costs.

Employment allowance

A scheme by HMRC that lets some small companies reduce their National Insurance costs by £4,000–£5,000.

Risk is

the possibility of something bad happening. It involves not knowing exactly what the effects of an action will be, especially on things people value like health, money, property, or the environment.  Businesses try to reduce or manage risks as much as possible.

Uncertainty is

when something is unknown and it’s hard to predict what will happen.

The principles of an effective tax system includes:

-Fairness, Certainty, Convenience and Efficiency

Direct Taxes:

Paid directly to the government, usually based on income or wealth.

·         Examples: Income tax, Corporation tax, National Insurance, Property tax.

·         Governments use these taxes to pay for services like the NHS and defense.

Indirect Taxes:     

These taxes can be passed on to someone else.

·         Examples: VAT (Value Added Tax), excise tax on petrol.

Micro-economic Environment: Businesses cannot control macro-economic factors like

inflation or interest rates, but they can influence micro-economic factors.

Micro-economic factors affecting a business include:

     Demand and supply of goods and services

·         Level of competition in the market

·         Size of the market they operate in

·         Reliability of the distribution chain

·         The availability and quality of suppliers

Benefits of international trading:

Can earn higher profits

·         Exchange rates can be beneficial

·         Reduces risks by spreading them across countries

·         Increases competitiveness, as businesses can buy goods cheaper from abroad

Disadvantages of International Trading:

·         Cultural and language differences

·         Political risks in other countries

·         Credit risks – foreign companies may not pay

·         Exchange rate risks

·         Logistics – difficulties in delivering goods from abroad

·         Extra costs – such as import duties from UK customs

·         Operating according to rules and regulations

·         Payment issues and cash flow

·         Operating in different time zones