Essential Economic Influences on Business

EXTERNAL INFLUENCES

  • Business activity is affected by external factors beyond control

ECONOMIC INFLUENCES

  • Key factors: Inflation, exchange rates, interest rates, taxation, government spending, business cycle
  • Government aims: stable prices, low unemployment, controlled borrowing, economic growth

INFLATION

  • Definition: Increase in general price levels reduces purchasing power
  • Negative effects on businesses:
    • Increased costs of goods from suppliers
    • Uncertainty in long-term pricing leads to challenges in contracts
    • Consumer behavior shifts: increased saving, decreased spending confidence
    • Influences competitiveness for exporters/importers

RESPONSES TO INFLATION

  • Possible business actions:
    • Search for cheaper suppliers
    • Raise prices
    • Negotiate wages
    • Build inventories
    • Outsource or relocate production

EXCHANGE RATES

  • Definition: Price of one currency in terms of another
  • Effects:
    • Appreciating currency makes exports costly; imports cheaper
    • Depreciating currency makes exports cheaper; imports costly

INTEREST RATES

  • Influence cost of borrowing; impacts business spending and consumer demand
  • Higher rates lead to:
    • Increased overhead costs
    • Reduced investment attractiveness
    • Potentially lower consumer spending due to higher loan costs
  • Responses by businesses:
    • Reduce borrowing
    • Postpone investment
    • Increase focus on high-interest savings

TAXATION

  • Governments use fiscal policy to influence economy through taxation and spending
  • Types of taxes affecting businesses:
    • Direct taxes: income tax, corporation tax, NI contributions
    • Indirect taxes: VAT, excise duties
  • Tax changes impact consumer spending and business costs

GOVERNMENT EXPENDITURE

  • Government spending impacts demand in the economy
  • Increased expenditure can benefit certain businesses; cuts can reduce demand

BUSINESS CYCLE

  • Fluctuations in GDP growth affect business operations and confidence
  • Phases:
    • Boom: increased output, profits, hiring
    • Downturn: slowing growth, rising unemployment
    • Recession: falling GDP, high unemployment, low business confidence
    • Recovery: rising GDP, improved demand, falling unemployment
  • Business responses vary by phase, from expansion during booms to contraction in recessions.