Economic Influences

• what are the five economic influences that will impact a business?

  • changes in inflation
  • changes in exchange rates
  • changes in interest rates
  • changes in taxation and government spending
  • the business cycle
• inflation: the general rise in prices in an economy over time
• consumer price index: measures monthly changes in the prices of a range of goods and compares these changes to earlier periods, calculating the rate of inflation
• problems caused by inflation are:

  • increased costs
  • higher repayment on loans
  • consumers change spending habits
  • international competitiveness reduces
  • uncertainty
• exchange rate: the value of one currency expressed in terms of another
• why might exchange rates fluctuate?

  • changing demand for a currency
  • economic growth
  • changes to interest rates
• appreciation: an increase in value of the £ against other currencies
• depreciation: a decrease in value of the £ against other currencies
• interest rate: a percentage reward offered for saving money or cost for borrwing
• what are the 4 key stages of the business cycle?

  • boom
  • recession
  • recovery
  • expansion
• an increase in taxation and government spending is likely to cause:

  • revenue to decrease, due to higher income tax and VAT, making products more expensive
  • costs to increase due to higher prices
• a business can prepare for economic uncertainty by:

  • building up cash reserves
  • keeping informed about the economic climate
  • being prepared to take advantage of any opportunities which arise