Economic factors to consider Inflation Changes in the Interest rate

(Monetary Policy) Unemployment Exchange Rate Taxation (Fiscal Policy)

Government Objectives

Stable Prices Economic Growth Low unemployment Increase the standard of living

The State of the Economy

Consumers buying behaviour will be influenced by whether the economy is in recession or not.

Recession is believed to be occurring when GDP falls for 2 consecutive quarters

Consumer confidence also has a large psychological affect on the economy

The backdrop

The Government would like to increase GDP or output or Aggregate Demand therefore helping business and individuals

AD= C+I+G+(X-M)

Consumption + Investment + Gov Spending + Exports minus imports

Changes in Interest Rates Definition: is the price charged by a

bank per year for lending money. This is greatly influenced by the Bank of England’s Base rate. In the UK the base rate is 0.5%

Why is the Interest Rate so Important to business? 1. The interest rate effects consumer

demand for goods bought on credit like cars or houses.

2. Affects operating costs for a business. It therefore makes running a bank loan or credit card or overdraft more expensive. This will lower profit or lead to firms increasing prices.

3. If there is expectation or an increase in the interest rate it discourages firms from investing in capital goods like machinery.

If interest rates fall the opposite is true

The C and I in the formula :

AD = C+I+G+(X-M)

Changes in Interest Rates affects

Exchange Rates

The exchange rate measures the quantity of foreign currency that can be bought with one unit of domestic currency.

Appreciation or rise of a currency For example £1=$1.50 goes to

£1=$2

For importers of goods and services its good. Cost of goods goes down.

For exporters they become less competitive.

Importers of cars $10,000 Exporters of cars £10,000

Depreciation or fall in the value of a currency Bad for importers as costs rise and

leads to inflationary pressures on goods and services

Good for exporters as they find their goods becoming more competitive

How does unemployment affect business? Unemployment is when the number

of jobs ( demand for labour) falls in comparison with people looking for jobs.

If an area of a country has high unemployment then people will generally demand less goods .

Starting a business in times of high unemployment can be risky

Different parts of the UK have different rates of employment

Often business can expand production in areas of high unemployment and then sell to other markets.

In boom jobs are available . However, in a recession the demand for jobs is low.

The demand for jobs in foreign countries compared to the UK

The amount of benefits available

What is inflation and how does inflation affect a business?

Definition : measures the percentage annual rise in the average price level

Advantages to business?

Inflation can boost record profitability. Inflation makes the business appear that it has increased profitability.

Firms with large loans benefit from inflation because it erodes the value of the loan.

Disadvantages of Inflation Inflation can damage profitability of a

business especially if it is a fixed rate contract. Costs could dramatically increase over the contract term

Pushes costs up , particularly buying new machinery

If UK inflation is rising faster than other countries business will find it difficult to compete.

Costs incurred when changing price lists constantly.

Government Spending and Taxation Increase in tax could be damaging to

business believing that long term gain is more favourable .

40% of the UK economy is generated by the Government so an increase in spending can boost economic activity.

Finally

Economic factors will affect different businesses in terms of

Size What the business does Strengths and Weakness

The UK

GDP = Target 0% Inflation = 2.4% in June 2012

( Target 2%) Unemployment = 2.59m Interest Rate ( base rate ) = 0.5%

How will economic factors in the UK affect the following businesses: Apple and the release of the iphone

5 in the UK BA ( British Airways) Virgin Ltd Dyson A small plumbing business A local Italian Restaurant

Tasks

1. Check the current values of UK base rate £ against the $ UK level of unemployment Latest GDP data

2. Can you find evidence to suggest whether the prevailing economic climate is currently optimistic or pessimistic? Do the values you checked have any link to the current economic climate?

3. Check your grasp of policy options by deciding which way each of the following could be changed to encourage lower unemployment

Income tax Government spending Interest rates Exchange rate of the pound