2.5.1 Economic Influences

• exchange rates : the price of one currency in exchange for another currency

  • currencies can change in value due to the demand & supply of that currency
• appreciation : a rise in the pound against other currencies means the pound can buy more of foreign currencies (high value/strong value of pound)
• depreciation : a fall in the pound against other currencies means the pound can buy less of foreign currencies (weak pound/ low value pound)
• Exchange rates & interest rates:

  • as exchange rates fall:
  • less saving & investment in the UK
  • less demand for the pound
  • the value of the pound falls /depreciates
  • interest rates fall
  • as interest rates rise so do exchange rates
  • Strong Pound Imports Cheaper Exports Dearer
• Interest rate : cost of borrowing money & rewarding for saving for saving money

  • if the Bank of England (BoE) pushes up interest rates, consumer & business spending will fall
  • the BoE is responsible for deciding the UK interest rate
  • it will raise the interest rates if inflation is high & lower them if inflation is not a problem
  • lower interest rates encourage economic growth & a fall in unemployment
• Changes in exchange rate:

  • interest rates rise:
  • cost of borrowing will increase
  • cost of supplies for a business may increase
  • fall in interest rates:
  • cost of debt/borrowing cheaper - easier to pay back
  • may lead to an increase in profits - cost less to borrow so less to pay back
• Government spending : the areas that government spends money on

  • extra government spending/lower taxes can lead to higher output & rates of employment
• Main types of Tax:

  • income tax : taken off an employee's salary
  • value added tax (VAT) : added to goods & services
  • corporation tax : tax on business profits
  • national insurance : payments made by both the employee & employer - pays for state pension & national health insurance
• Government Policy:

  • government may change the tax it charges at any point
  • this can affect inflation & unemployment
  • if % of VAT goes up business may:
  • pass the costs onto the consumer making goods more expensive to buy
  • absorb the extra costs so that prices remain the same but to profit margins are lowered
• The business/economic cycle:

  A) Boom

  B) Slump / Depression

  C) recession

  D) recovery

  
• Boom : high prices, high wages, high consumer spending
• Recession : businesses look for other markets, investments fall, low profit, redundancies
• Slump/depression : more redundancies, consistent high unemployment, low consumer spending, shop/factories close
• Recovery : increased production, wages rise, unemployment declines, consumers start to spend more
• Economic Uncertainty : when it is difficult to forecast the level of supply & demand in an economy

  • planning becomes more difficult & businesses are less likely to take risks
  • Occur as a result of : fluctuating exchange rates, economic growth uncertainty, turbulence in the price of key commodities
  • prepare for uncertainty by:
  • building up cash reserves during good times
  • keeping informed on the economic climate
  • being ready to take advantage of opportunities when they arise