2.5.1 Economic Influences

Inflation

🔗 The general rise in prices of goods and services in an economy

Higher

• Higher inflation means higher revenues from the same amount of output, as prices have risen, increased profitability, improved market share
• High inflation may increase the costs of raw materials, increased costs of production, an upward pressure on price per unit to maintain profit margins
• High inflation may prompt workers to raise their wage demands to maintain their standard of living, could mean lower productivity until wage demands are met, fixed costs spread over a lower range of output in the short term
• High inflation may mean higher interest rates, higher cost of borrowing, may deter investment into business development and reinvesting, could reduce competitiveness, fall behind competition, lose sales
• Lower consumer spending, less disposable income

Exchange rate

Appreciation (strong pound) – A rise in the value of a country's currency rate against another currency.

• Imports become cheaper, lower raw material costs for businesses, lower cost per unit, can reduce prices whilst maintaining profit margins, increased sales volume and revenue, more globally competitive
• Exports are more expensive, foreign buyers need more of their currency to purchase goods, may deter value-conscious customers, Lower sales, less globally competitive

Depreciation (weak pound) – A fall in the value of a country's currency against another currency.

• Exports cheaper, cheaper for foreign buyers with their currency, more attractive to value-conscious customers, higher demand for products abroad, may increase sales volume and revenue, increased global competitiveness
• Imports are more expensive, higher cost of raw materials for business, higher cost per unit, upward pressure on price per unit to maintain profit margins, may have to increase prices, less attractive to foreign buyers, less globally competitive

It depends on the cause of fluctuation in the exchange rate – Fluctuations from uncertainty could cause a lack of consumer confidence in other countries, making businesses less competitive

Interest rates

🔗The cost of borrowing and the return on savings

Fall

• Consumers are less incentivised to save due to receiving a lower return, increased spending, and higher sales for business
• Lower cost of borrowing, the business can use external finance methods e.g. loans without experiencing as high interest rates, lower costs, can use this to re-invest into the business

Taxation

Fall

• Lower taxes encourage consumers to consume more goods, higher demand, increased spending, higher sales for business
• Lower taxes would reduce the government's tax revenue, less money to re-distribute in the economy and aid businesses e.g. in the form of subsidies, may struggle to finance operations, struggle to keep up with competition and fall behind, lose market share, reduced profitability

Government spending

• Higher government spending on incentives such as subsidies allows firms to supply more products without extra costs, can reduce prices whilst maintaining profit margins, more price competitive, stimulates more sales
• To finance government spending, higher taxes may need to be given, reduces the purchasing power of consumers, lowers demand, lowers sales, and reduces revenues. Also reduces the ability of firms to re-invest, struggle to keep up with competition and fall behind, lose market share, reduce profitability

Benefits and drawbacks

• Helps a business to determine their prices in each stage of the cycle, more informed and effective decision-making, allows them to maximise sales at each stage
• External shocks can immediately put the economy in a recession, could mean a detrimental fall in consumer spending, reducing demand and causing falling sales. business needs to have contingency plans

Effects of economic uncertainty

• Causes consumer confidence to fall, reduces demand for luxury goods and services in an economy, lower sales, lower revenue
• Reduces the willingness of banks to lend and businesses to reinvest, causes business stagnation on the international scale, reduces profitability