Economic Influences

• External influences


  Factors beyond the control of the business
• Inflation


  A sustained increase in general price levels
• Effects of inflation on business

  1. Increased costs

  2. Uncertainty

  3. Borrowing and lending

  4. Reduced consumer demand

  5. Reduced international competitiveness
• Deflation


  A general fall in price levels
• Short-term effects of deflation on business

  1. Reduced costs

  2. Boosted profit margins
• Long-term effects of deflation on business


  1. Reduced demand

  2. Reduced sales

  3. Reduced profits

  4. Reduced costs

  5. Reduced standard of living

  6. Increased unemployment
• Exchange rates


  The price of one currency expressed in another currency
• Currency appreciates


  Currency gets stronger and commands more of a foreign currency
• Currency depreciates


  Currency gets weaker and can't get as much of a foreign currency
• Weak currency


  • Product more price competitive in overseas markets
  • Not good for imports as you get less stock for each £1
• Strong currency


  • Exports less price competitive in overseas markets
  • Need to concentrate more on domestic markets
• Interest rates


  The cost of borrowing or benefit of saving money
• Effects of increased interest rates on consumers

  1. More saving

  2. Less borrowing

  3. Existing debts cost more
• Effects of decreased interest rates on consumers

  1. Less saving

  2. More borrowing

  3. Existing debts cost less
• Effects of increased interest rates on businesses

  1. Existing debts have increased repayments

  2. Discouraged from future investments

  3. Reduced innovation

  4. Less sales from consumers
• Effects of decreased interest rates on businesses


  1. Existing debts cost less

  2. Encourages investment

  3. Increased innovation

  4. More sales
• Taxation


  The imposition of compulsory levies on individuals or entities by the government
• Effects of personal tax changes

  1. Rise in income tax = less disposable income = less spending

  2. Decrease in income tax = more disposable income = more spending
• Effects of business tax changes

  1. Rise in corporation tax = higher costs = lower profits = less reinvestment

  2. Decrease in corporation tax = lower costs = higher profits = more reinvestment
• Effects of spending tax changes

  1. Rise in VAT = higher prices = less demand

  2. Decrease in VAT = lower prices = more demand
• Economic cycle


  The state of a country in terms of how many goods the country is producing and consuming
• GDP


  The value of all the goods and services produced in a country in a year
• Phases of the business cycle


  • Boom
  • Slump
  • Recession
  • Recovery