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Unit 2- Economic influences :star: - Coggle Diagram
Unit 2- Economic influences
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Inflation
= when the general price level is rising, if inflation is too high then it will affect the economy
How does inflation affect businesses
causes uncertainty as businesses does not know what will happen in 3 months time (decisions have to be made now which will affect businesses in the long term)
less consumer spendings ( consumers react inflation the same way as businesses, so they might not be willing enough to spend money on goods)
increased cost ( suppliers cost rises all the time and businesses have to spend time reserching for the best deals, businesses often send their employees on foot to gather this information)
How might businesses respond to inflation
build up inventories ahead of further inflation so that products are sold at future higher prices
look to outsource or relocate production overseas if domestic costs start to rise
search for cheaper suppliers if costs of materials and other resources start to rise
How is inflation measured
By consumer price index, this involves gathering information about the prices of goods and services in the economy.
Interest rates
= price of borrowing or saving money
Effect of interest rates on demand
stock (a rise in interest rates will increase the cost of keeping stock, but cutting stock reduces orders for businesses further up the chain of production, restocking due to higher interest rates will therefore cause a fall in demand throughout much of industry)
exports and imports (eg. a rise in the rupee will make it harder for Indian businesses to export profitably, there is likely to be a fall in exports and loss of sales to importers in the domestic market which will reduce demand and hit Indian businesses.
How might businesses respond to changes in the interest rate (higher interest rates):
businesses with a wide range of financial assets might begin to put more money into deposit accounts since returns will be greater.
postpone or cancel marginal investment projects. Higher interest rates means that marginal project become unprofitable.
reduce the amount they borrow by cutting back on loans and overdrafts - which will help to compensate for the higher cost of borrowing
Lower interest rates:
firms may borrow money to invest in machinery and launch new products.
demands will rise so may need to recruit more staffs and increase their productive capacity, may also need to move to larger premises
Effect of interest rates on investments
A fall in demand ( reduces total spending in the economy, this might affect the profitability of many investments projects)
the costs of loan (increases the cost of borrowing money, this reduces profitability, persuade some businesses to cancel their investment plans)
Exchange rates
(
appreciation-
rise and
depreciation
-fall )= the price of one currency in terms of another
Impact of depreciation
The impact on the demand for imports and exports is the opposite
How are businesses affected by exchange rates
For example, if the value for rupee falls, Indian exporters will benefit because the price of exports fall and demand should increase
However, Indian importers will lose out because their purchases will be more expensive, this causes uncertainty for the business as it is difficult to predict demand for exports and the costs of imports.
Impact of appreciation
for example if the demand for UK export rises, there will be an increase in the demand for pounds)
The increase in demand for pounds will rise the exchange rate, when it rises th exchange rate has appreciated
How might businesses repond to a change in exchange rates
Appreciation
: An export business will find that the prices of its products will be higher for overseas costumers, therefore its harder to trade and they might respond by lowering their prices. This will gain loyalty of customers
Depreciation
: An export business will find that the price of its products will be lower for customers, they might respond by raising prices to increase their profit margins as customers will not feel the impact. They may also lower their prices to gain international customers.
Business cycle
=intervals of expansion followed by recession in economic activity.
The 4 stages
Recession
= Demand will start to fall for many goods and services- particularly non-essentials, unemployment rises sharply.
Upswing
= Demand start to rise, unemployment begins to fall and prices start to rise again
Downturn
= the economy is still growing but at a slower rate. Demand will flatten or begin to fall and unemployment will rise.
Boom
= GDP is growing fast because the economy is performing well. Existing firms will be expanding and new firms enter the market.
The impact of the business cycle on business
Employment= unemployment falls during boom as businesses take more workers to cope with rising demand. However, during recession they may lay off workers and unemployment rises
Investments= During boom, business owners are prepared to take more risks (launch new products). During recession, investment is likely to fall (may not replace their out-of-date machinery)
Profit= profits are likely to rise during boom because demand is rising and it is easier to raise prices. However when income starts to decline, businesses may cut their costs to maintain profit levels.
How might businesses respond to the different phases in the business cycle
During boom, most business owners will be looking for opportunities to expand their operations and increase their profitability.
During recession, most businesses will lay off staffs, some of their recesses and downsize operations , most investment will involve the replacement of worn out machinery.
Taxation
= the charger made by government on the activities, earnings and income of businesses and individuals.
The effect on businesses of changes in taxation
Importing and exporting ( if a country raised custom duties on imported products a domestic business might benefit because imports again which it competed with then have a higher price, however domestic businesses buying imported supplies would have to pay higher prices)
Business spending and investments ( increase in costs and reduced profits mean that businesses have less retained profit)
consumer spending ( increase in income taxes may lead to customers with less income and reduce spending on products
How might businesses respond to changes in taxation
if there is an increase in the rate of corporation tax businesses might decide to relocate their corporation in a country where corporation taxes are lower.
Government expenditur
e= the amount spent by the government in its provision of public services
The effect of changes in government expenditure on businesses
If the government increases spending to more than it raises in taxes, total spending in the economy will rise.
cuts in government expenditure are generally bad for businesses because it usually means a fall in demand ( for example, if the government reduces the number of public sector employees there will be a fall in demand for many goods and services.
How might businesses respond to changes in government expenditure
May react positively to higher levels of government expenditure as demand in the economy tends to rise when the government spends more.
Government may spend more on public sector than private sectors, so private sector businesses might raise prices rather than invest and expand.