6:External influences on business acticity

• The main stages of a business cycle are:

  growth->boom->recession->slump


  The change in the economic activity as the economy grows and shrinks over a number of years is known as the business cycle.
• Growth stage-is when the economy recovers or grows. Its key characteristics are:

  1. A positive outlook for new businesses
  2. Existing businesses grow and make profits
  3. Growth in economic activity is stage is measured by a rise in GDP until it reaches a maximum(boom)
  4. Falling unemployment as there are more jobs due to businesses doing well
  5. Raised standards of living as more people are employed.
• Boom-This stage is the peak of the business cycle. Its key characteristics are:

  1. Business investments and profits are at their highest levels
  2. Most sectors of the economy are performing at their best
  3. High levels of demand for goods and services causing prices to rise(inflation)
  4. Very low unemployment rates and people have better jobs to choose from

  • This leads to increased wage costs for businesses as well as a shortage of skilled people
• Too much spending and high borrowing costs during the 'boom' stage may be risky for businesses. If the economic outlook looks poor, the economy may go into a decline
• Recession- This is when the economy shrinks in size. Its key characteristics are:

  1. Business confidence falls leading to less investment in new and existing businesses
  2. Decline in economic activity until it reaches a maximum(slump)
  3. Falling demand by consumers leading to reduced profits
  4. Unemployment rises as businesses are not doing well and have to cut costs. Workers are made redundant and some businesses even close down
• Slump-This is when the recession stage of the economy is at its worst. Its key characteristics are:

  1. Very low business confidence with very little investment in new and existing businesses
  2. Low production of goods and services-Many businesses close down
  3. Low demand for goods and services
  4. High unemployment due to low business activity
• A government economic objective is a POSITIVE BALANCE OF PAYMENTS-

  • The balance of payments of a country is positive when the value of exports is greater than the value of imports(balance of payments surplus)
• Balance of payments-The difference between the value of export and import of goods and services of a country over a year
• • If there are more imports than exports, then there is more foreign currency flowing out than coming into a country. This is known as a BALANCE OF PAYMENTS DEFICIT, which can cause a shortage of foreign exchange.
  • This means the government of the country may have to borrow foreign currency from other countries at expensive rates of interest, which can negatively affect the exchange rate of a country.
• Government objectives are :

  1. Positive balance of payments
  2. Low unemployment
  3. Low Inflation
  4. Economic growth
  5. Increasing Gross Domestic Product(GDP)

  In order to achieve these economic objectives, governments affect the economic activities of a country by controlling interest rates(monetary policy), tax rates and government spending(fiscal policies).
• Governments look for a steady growth in the economic activity of their country:

  • If the growth is too fast, it may not be long-lasting as the infrastructure to support this growth may not exist. A slow growth rate will increase unemployment levels as there will be fewer jobs.
• Taxes are used by governments to pay for investments they make in public services such as education, health and transportation. Taxes may be direct and indirect.
• Direct tax- The tax charged on the personal income or tax on the profit made by a business, such as income and corporation tax
• Disposable income- The amount of income left for individuals after taxes have been paid