External Influences - Business Study Notes

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ECONOMIC GROWTH

Economic growth is an increase in the nation’s production of goods and services. It is measured in GDP.

  • Growth potential of an economy depends on the amount and quality of economical resources available (eg labour and fixed assets).
  • Also depends on productivity (how hard a nation works)
  • Governments can make short term growth by lowering tax and interest rates. This makes businesses borrow money for production and make consumers borrow money to spend. = increase in demand in economy

What can economical growth do?

Businesses -

  • growth in GDP means higher revenues and higher profits
  • gives economies of scale
  • increases confidence in businesses and helps plan for the future
  • BUT may cause shortages of raw materials and skilled labour due to fast growth

Governments -

  • Higher revenue = more investment in new projects = more jobs = less to pay for welfare benefits
  • increase revenue through taxation
  • BUT high rates of growth lead to recessions! governments counter this by keeping growth at a sustainable level

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Environment -

  • High economical activity can kill off non-renewable resources
  • Increased pollution due to large economical activity

GDP - GROWTH DOMESTIC PRODUCT INDICATES THE SIZE OF A NATIONS ECONOMY

IT IS THE TOTAL MARKET VALUE OF GOODS AND SERVICES PRODCUED BY A NATION WITHIN THAT NATION DURING A PERIOD OF TIME

gdp = total consumer spending + business investment + government spending + value of imports - value of exports

BUSINESS CYCLE - a pattern of regular growth and recession

BOOM =  

  • HIGH PRODUCTION
  • POPULATION REACHES MAXIMUM CAPACTIY WHICH MEAN SHORTAGES AND THEREFORE INCREASED PRICES
  • SKILLED LABOUR SHORTAGES = HIGHER WAGES

RECESSION =

  • INCOMES GOES DOWN
  • BUSINESS CONFIDENCE IS REDUCED

SLUMP =

  • LOW PRODUCTION
  • HIGH REDUNDANCIES
  • HIGH UNEMPLOYMENT
  • BUSINESSES GO BANKRUPT OR INSOLVENT

RECOVERY =

  • PRODCUTION INCREASES
  • EMPLOYMENT INCREASES
  • PEOPLE HAVE MORE MONEY TO SPEND


WHAT DO BUSINESSES DO DURING THESE CYCLES?

During a boom, a business can raise prices. This increases profitability and slows demand slightly. New products are released during this time to take advantage of consumer wealth.

During a recession, a business can make workers redundant to save wages costs. If the recession is national, businesses locate abroad.

Worldwide recessions = bad for everyone. Worldwide recovery = good for everyone

ECONOMIC VARIABLES

INFALTION - AN INCREASE IN THE PRICE OF GOODS AND SERVICES

  • measured by Retail price index (RPI) - which lists the prices of products and goods the average household would buy
  • Bank of England keeps the inflation rate within a target range set by the government

Inflation affects consumer spending and business strategy

  • If inflation is high, spending goes up (people rush to buy more goods or services before the prices go up even more. If wages don’t go up in line with inflation, spending goes down as people can afford less)
  • Easier to plan when inflation is low due to stable prices. businesses can make forecasts easier because of low inflation
  • High UK inflation = makes UK exports expensive = makes UK businesses less competitive abroad. Low inflation in the UK = competitive advantage for UK businesses abroad

INTEREST RATES - THE PRICE PAID FOR BORROWING MONEY

  • INTEREST RATES SHOW THE COST OF BORROWING MONEY
  • fall in interest rates  = more business activity (because it is cheaper for the business to borrow money to invest into the business)
  • rise in interest rates = less business activity (because it is more expensive for the business to borrow money to invest into the business)
  • high interest rates = less disposable income = less market demand
  • Interest rates affects depends on the product the customer buys. if it is a house they will be affected by interest rates.
  • Businesses compare UK interest rates abroad. If there are low rates elsewhere, the business will  invest there as it is cheaper to borrow therefore cheaper to expand or produce products
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EXCHANGE RATES IS THE VALUE OF ONE CURRENCY IN TERMS OF ANOTHER CURRENCY

Affects the amount of foreign trade

  • HIGH ECHANGE RATES (MORE euros to the pound) = UK EXPORTS are expensive... IMPORTS are cheap. HIGH EXCHANGE RATES are bad for exporters as their products are not competitively priced aboard
  • LOW EXHANGE RATES (MORE pounds to the euro) = UK EXPORTS are cheap for foreigners... IMPORTS are expensive
  • Strong pound and cheaper imports means lower costs for UK businesses importing raw materials from abroad, but bad for UK exporters
  • IF ...

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