Economic Influences

• level of demand is influenced by the rate of economic growth
• economic influences link with:

  • demand
  • competitiveness
  • sales forecasting
  • Budgeting
  • cost
  • business objectives
• some economic influences:

  • household incomes
  • exchange rates
  • Inflation
  • interest rates
  • taxation
  • government spending
  • business cycle
• GDP?


  measure of the value of output in the economy
• value of GDP is used to assess changes in economic growth
• demand?


  the amount of a product/service that customers are wiling and able to pay for at a given time
• demand turns into revenues (sales)
• business cycle includes:

  • sequence of slump, recovery, boom and recession
  • regular pattern of 'ups and downs' in economy
  • measured by changes in GDP from one quarter to the next
•   business cycle?

  
• boom stage in business cycle?


  high level of consumer spending, business confidence, profits and investment. Prices and costs tend to rise faster. unemployment tends to be low
• recession stage in business cycle?


  falling levels of consumer spending and confidence mean lower profits for businesses - which start to cut back on investment, spare capacity increases + rising unemployment
• slump/depression stage in business cycle?


  very weak consumer spending and business investment; many business failures; rapidly rising unemployment; prices may start falling
• recovery stage in business cycle?


  things start to get better; consumers begin to increase spending; businesses feel a little more confident and start to invest again; but it takes time for unemployment to stop growing
• main causes of the cycle:

  • changes in the level of business and consumer confidence
  • alternating periods of stocking and de-stocking
  • changes in the value of consumer spending and business investment
  • changes in government policy which can induce a change in the economy
• economic variables:

  • changes in inflation
  • changes in exchange rates
  • changes in interest rates
  • changes in taxation and government spending
  • changes in business cycles
• what is changes in inflation?


  inflations is the increase in prices in economy over time.
• what is consumer price index (CPI)?


  measures monthly changes in the prices of a range of goods/services and compares these changes to earlier periods
• what are the disadvantages of inflation?


  • increased costs
  • higher repayments on loans
  • consumers change spending habits
  • international competitiveness
  • uncertainty
• what is exchange rates?


  exchange rates is the value of one currency expressed in terms of another
• why does exchange rates change?


  • economic growth
  • changes to interest rates
  • changing demand for currency
• what happens when currency increases on exporting businesses?


  • sales falls as products becomes expensive
  • to remain competitive - businesses need to lower prices and accept lower profit margins
• what happens when currency increases in importing businesses?


  • costs fall as suppliers from overseas become cheaper
  • business seek to expand pool of overseas suppliers to further reduce costs and maximise profits
• what happens when currency decreases in importing businesses?


  • costs rises as suppliers from overseas become more expensive
  • businesses seek domestic suppliers to reduce costs and maintain profit levels
• what happens when currency increases in exporting businesses?


  • sales rise as products become cheaper
  • business may increase selling prices to increase profit margins
• what is interest rates?


  a percentage reward offered for saving money and the percentage charged for borrowing money
• what happens when interest rates rises?


  businesses will have to pay more on new/variable rate borrowing - increase their costs
• why would exporting businesses demand fall as interest rates rise?


  it strengthen the value of the domestic currency and make their products comparably more expensive abroad
• what is taxation and government spending?


  governments impose direct and indirect taxes on businesses and households
• what is effected when taxation increases?


  • revenue
  • costs
  • business decision
• how is revenue impacted when taxation increases?


  • decreases
  • increases income tax reduces disposable
  • income and demand falls
  • increased VAT increases cost of products - customers will switch to alternative products
• how is cost impacted when taxation increases?


  • cost rises as taxes rises
  • higher costs offset by charging higher prices
  • higher prices lead to lower sales and profit falls
  • costs rises when customer duties raises
• how is business decisions impacted when taxation increases?


  • if tax increases business spending may change as less profit retained to cover expenses/make plans for expansion
  • operational design may be affected
  • businesses may change production methods to reduce use of highly-taxed components
• what is a business cycle?


  upturns and downturns in levels of country's economic activity (GDP) over time
• what are the four stages of a business cycle?


  • boom
  • recession
  • recovery
  • expansion
• what happens in the boom stage of a business cycle?


  period of time where an economy experiences high rates of economic growth
• characteristics of the boom stage:


  • decreasingly unemployment
  • increasing job vacancies
  • high confidence and risky decisions taken
  • increasingly rate of inflation
  • improved budgets - tax revenues increase and government expenditure falls
• what impact does the boom stage have on businesses?


  • customer disposable income increases - higher sales revenue
  • recruitment and staff retention becomes more challenging - need to pay higher wages
  • business looks to expand + maximise profit - production levels increase
  • interest rates increase + higher cost of borrowing will increase the risk of capital investment
  • lower government spending may impact on business growth plans
  • public sector pay controls cause industrial unrest and affect business operations
• what happens in the recovery stage in the business cycle?


  occurs when an economy experiences two consecutive quarters (6 months) or more of negative economic growth
• characteristics of the recovery stage:


  • high employment
  • low confidence
  • low inflation/deflation
  • increase in government expenditure
• what impact does the recovery stage have on businesses?


  • customers have less disposable income leading to lower revenue
  • easy to recruit worker from large pool of candidates
  • delays spending decisions and focuses on reducing risk and survival
  • productivity reduces
  • businesses stockpile products
  • increases spending on welfare benefits and spending in fracture projects to inject demand into economy may benefit some businesses