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2.5 External Influences
2.5.1 Economic Influences
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Cards (8)
Factors Affecting the
Economic
Climate
-Business
cycle
-Inflation
-Interest rates
-exchange rates
-taxation and
government
spending
Business
Cycle
The regular fluctuations in GDP/ economic activity
Effects of the
Business
Cycle
-In a boom, there is increased consumer/ investor
confidence
-Too much output is
unsustainable
leading to a bust/ recession
Negative Effects of
Inflation
-Erodes the spending power of savings causing a fall in living
standards
-Damages
profitability
-UK companies lose their ability to compete with
foreign
firms
Effects of
High
Interest Rates
-Consumer
demand
decreases
-High interest means lower
profits
-Less investment due to high opportunity cost
Effect of
Exchange
Rate
-Weak pound means UK exports are more
competitive
-A strong pound means importing
raw
materials is cheaper
Effects of
Government
Spending/ Taxation
-Governments increase
taxes
which decreases spending power to reduce
demand
which harms firms
-Reduced government spending leads to redundancies and reduces
incomes
-Firms can prepare in
advance
for this
Factors Affecting
Uncertainty
-The value of the
pound
-The rate of economic
growth
-The value of
oil
this makes planning difficult