2.5 External influences

• inflation


  a sustained increase in the average price level of an economy
• measuring an economy


  - GDP (Gross Domestic Product)

  - business cycle

  - inflation

  - interest rates

  - exchange rates
• Consumer Price Index (CPI)

  a measure of the annual percentage change in the level of prices
• key characteristics of consumer price index

  1. main measure of inflation in the uk

  2. measures the price changes in a basket of good to calculate the rate of inflation

  3. rate of inflation is set at 2%

  4. target is to achieve a sustained period of low and stable inflation
• limitations of inflation


  1. people lose confidence in money as the value of savings is reduced

  2. inflation can get out of control - price increases lead to high wage demand to maintain standard of living

  3. those will fixed incomes lose - real incomes fall and employees in poor bargaining positions lose out
• exchange rates


  the value of one currency in terms of another
• SPICED


  Strong

  Pound

  Imports

  Cheaper

  Exports

  Dearer
• individual tax


  income tax, national insurance
• business tax


  corporate tax, VAT
• discrimination


  favouring one person or group over another
• employee protection


  equality, anti-discrimination, minimum wage law
• consumer protection


  consumer rights, data protection, trade descriptions
• health and safety legislation

  safety in the workplace
• environmental protection


  waste disposal, emissions
• competition law


  fair competition between business, avoiding price wars
• unemployment


  percentage of working population who are without a job and are actively seeking a job
• national minimum wage


  a wage set by the government that is illegal to pay below
• appreciation


  an increase in demand for the pound means that the pound will increase in value
• depreciation


  the currency falls in value
• interest rates


  the reward for saving and the cost of borrowing (%)
• high interest rates


  lower spending, more saving
• low interest rates


  more spending, less saving
• the business cycle


  the rate of change in the value of economic activity, for example (GDP)

  
• boom


  1. high levels of consumer spending, business confidence, profits and investments

  2. prices and costs rise faster

  3. unemployment is lower
• recession


  1. two consecutive quarters of negative growth

  2. lower levels of consumer spending and confidence means lower profits for businesses - cut back on investments

  3. spare capacity increases, unemployment increases
• depression


  1. very weak consumer spending and business investment

  2. increased business failure

  3. rapidly rising unemployment

  4. prices may start falling
• recovery


  1. GDP increases

  2. consumer begin to increase spending as confidence increases

  3. business may feel a little more confident and invest again

  4. unemployment may start to fall
• economic uncertainty


  occurs when it is difficult to forecast the level of supple and demand in an economy
• commodities


  primary products sold for production or consumption just as it was found in nature
• monopoly


  a market with one business dominating the market with the highest market share
• oligopoly


  a few large firms dominate the market
• economic forecasting


  a method to reduce the impact of economic uncertainty by predicting future economic events
• advantages of economic forecasting

  1. businesses can minimise the impact of future economic events (conserving cash etc)

  2. provide a structured way of assessing how a multitude of factors could affect the economy
• contingency planning


  planning business continuity in the event of an unexpected outcome, that can help prepare for economic uncertainty
• barriers to entry


  obstacles that make it difficult for new firms to enter the market