Section 10 - External Influences

• Interest rate


  The cost of borrowing money, charged as a percentage of the amount borrowed
• A fall in interest rate


  Decreases the cost of borrowing for businesses
• A rise in interest rate


  Increases the cost of borrowing for businesses
• Interest rate on savings


  The amount of money paid into a savings account by the bank, as a percentage of the amount saved
• The Bank of England base rate


  Influences the interest rates offered by banks, although banks can choose to set their rates higher or lower than the base rate
• Changes in interest rates


  Affect business costs if they have a loan or mortgage, and also affect consumer spending and therefore demand for businesses
• High interest rates


  Reduce consumer spending as people have less disposable income, and increase the incentive to save rather than spend
• Low interest rates


  Increase consumer spending as people have more disposable income, and reduce the incentive to save
• The effect of interest rate changes on demand


  Depends on the product - products that often require borrowing are more sensitive to interest rate changes
• Businesses facing higher interest rates


  May change strategy to diversify away from products sensitive to interest rate changes
• Inflation


  An overall increase in the price of goods and services within an economy
• Demand-pull inflation


  Inflation caused by too much demand exceeding the economy's ability to supply
• Cost-push inflation


  Inflation caused by rising costs pushing up prices, e.g. employee wage rises
• Rate of inflation


  The percentage change in the price of goods and services within an economy in one year compared to the previous year
• Expectations of inflation


  Can make inflation worse as businesses and workers raise prices and wages in anticipation
• High inflation


  Can temporarily increase spending as people rush to buy before prices go up further, but reduces spending if wages don't keep up
• High inflation in the UK


  Makes UK exports more expensive abroad and UK imports cheaper, reducing the competitiveness of UK businesses globally
• Deflation


  An overall decrease in the price of goods and services within an economy
• Deflation


  Causes a fall in productivity as businesses reduce prices and output, often leading to a rise in unemployment
• Consumer Prices Index (CPI)


  A measure of inflation in a country, tracking the changes in the average cost of a basket of hundreds of goods and services
• The CPI is calculated using the equation: Index number = (average value of basket / base value of basket) x 100
• Premium goods


  Are the most likely to be affected by inflation as consumers look for cheaper alternatives
• High inflation


  Can be a good time for firms to expand as interest rates are lower, making it cheaper to borrow money to invest
• High or fluctuating UK interest rates


  Encourage firms to expand in countries with low, stable interest rates instead as it's cheaper to borrow money
• Exchange rate


  The rate at which one currency can be exchanged for another
• Appreciation of a currency

  The currency becomes worth more in terms of another currency
• Depreciation of a currency


  The currency becomes worth less in terms of another currency
• Appreciation of the pound


  Makes UK exports more expensive abroad and UK imports cheaper
• Depreciation of the pound


  Makes UK exports cheaper abroad and UK imports more expensive
• To convert between currencies using an exchange rate, you multiply the amount in one currency by the exchange rate to get the amount in the other currency
• Currency index numbers are used to compare the exchange rates of different currencies, with a base year of 100
• A decrease in a currency's index number


  Indicates the currency has depreciated against the base currency
• An increase in a currency's index number


  Indicates the currency has appreciated against the base currency
• above, this give the ceracy indes saber for 2009 as 9.5
• askows that the exchange rate for pounds to Caradan dolas decased by 16.1%
• So the den show that the pound depreciated
• inthe nao me than it depreciated agai
• the Canadian dollar from 2008 to 2009
• She cry index numbers for 2006 to 2018 have been pleted on the graph on the right
• Curency ind graphs can be used to see treads over ver