3.7.5 - economic change

impact of economic changes on strategic decision making

• expanding abroad during global growth

• delaying investment during recession

• changing pricing strategy

impact of economic change on functional decisions

• adjusting budgets for inflation

• revising HR plans in response to labour costs

• managing stock levels based on demand

what are the main economic factors

• GDP

• taxation

• exchange rates

• inflation

• fiscal and monetary policy

• more open trade v protectionism.

what is GDP

total value of goods and services produced in a county over a period of time

what happens when GDP is rising

• higher consumer spending

• greater confidence in expansion and investment

• job creation - lower unemployment

• opportunities for growth an exports

what happens when GDP is falling 

• lower consumer demand

• firms cut costs or postpone investments

• job losses - lower disposable income

• threats from falling demand and gas flow problems 

what is taxation

taxes are payments to the government that affect both business costs and consumer demand 

what is corporation tax

• tax on business’ profits 

effect of corporation tax

• directly affects profit

• a cut encourages investment; a rip discourages it 

effect of income tax

• influences consumer spending 

• higher tax = less disposable income 

effect of VAT

• affects product prices and demand 

• higher VAT reduces sales level

effects of business rates

• increased fixed costs, especially for retail and hospitality 

what are exchange rates

value of once currency compared to another

what happens when the pound strengthens

• UK exports become more expensive abroad

• imports become cheaper

what happens when the pound weakens

• UK exports become cheaper abroad 

• imports become more expensive 

strategic impacts of exchange rates

• importers benefit from a weak pound

• exporters benefit from a strong pound

functional impact of exchange rates

• finance teams manage exchange rate risk

• marketing may adjust export pricing 

• operations may source inputs locally or abroad depending on rates 

what is inflation 

measures the rates of increased in general price levels over time, using the Customer Price Index (CPI)

effects of high inflation

• high costs of production - lower profit margins 

• low customer purchasing power

• pressure to increase wages

• uncertainty - lower investment 

effects of low/ stable inflation

• predictable costs aid planning 

• stable demand levels 

• easier to maintain competitiveness

• confidence increases

strategic impact of inflation

may influence:

• pricing strategies

• cost cutting 

• automation investment 

functional impact of inflation

• finance revises budgets

• HR negotiates pay 

• Operations manage efficiency 

what is fiscal policy 

• government use of taxation and spending to influence the economy 

what is expansionary fiscal policy

taxes decreased, spending increased

what is contradictory fiscal policy

taxes increased, spending decreased

effects of expansionary fiscal policy

• boots demand, output and employment 

• opportunity for growth and higher sales 

effects of contradictory fiscal policy

• reduces inflation and government debt

• threat to revenue and investment plans

strategic impact of fiscal policy

business expansion and investment in confidence

functional impact of fiscal policy

• Marketing adapts to rising demand

• finance manages government incentives or grants 

what is monetary policy

use of interest rates and money supply by the Bank of England to control inflation and influence growth 

effects when interest rates rise

• increased borrowing costs - investment decreased

• lower consumer spending on credit 

• higher savings attractiveness 

effects of interest rates falling

• decreased borrowing costs 

• higher demand for luxury and branded goods. also durable goods (house, car)

• lower savings, higher consumption and spending 

what is trade policy

how freely goods and services move across borders

feature of open trade

• fewer tarrifs and barriers - easier export access

• increased competition - lower prices + innovation

• opportunity to expand globally

features of protectionism (opposite of open trade)

• tarrifs, quotas, subsidies restrict imports 

• protests domestic industries and jobs

• threat from retaliation and trade wars 

strategic impact of free trade

international expansion opportunities

strategic impact of protectionism

focus on domestic markets or supply chain reshoring 

opportunities from economic change

• economic growth - rising sales

• lower interest rates - cheaper borrowing 

• weak pound - export boost

• low taxes - higher profitability 

• free trade - global expansion

threats from economic change

• recession - falling demand

• inflation - higher input costs

• strong pound - reduced competitiveness

• high taxes - lower retained profits 

• protectionism - trade barriers 

benefits of analysing economic change for a business

• allows for proactive strategy

• improves financial planning and risk management 

• supports investment and pricing decisions 

• builds resilience to economic shocks 

limitations of analysing economic change for a business

• uncertainty - forecasts can be wrong

• global interdependence - one nation’s change affects others unpredictability

• lag effects - policies take time to influence business conditions