2.5 External Influences

Question 1

What is inflation?

Answer 1

The general rise in prices in an economy over time

Question 2

What does the consumer price index measure?

Answer 2

The monthly changes in the prices of a range of goods and services and compares these changes to earlier periods, calculating the rate of inflation.

Question 3

What are the problems caused by inflation?

Answer 3

Increased costs:
- Workers often demand higher wages to compensate for the increase in the cost of living
- Suppliers increase the cost of raw materials and components
- Utilities such as electricity become more expensive

Consumer change in spending habits:
Inflation deters consumers from making significant purchases as purchasing on credit becomes too expensive.

International competitiveness:
Where domestic inflation rates are higher than those in other countries:

• UK businesses are less likely to be competitive and lose sales
• Imports of overseas competitors are likely to cheaper than domestic goods

Uncertainty:
Occurs when businesses cannot predict prices even in the short term
- Survival may need to become the key business objective until stability returns
- Spending and contract decisions are likely to be delayed

Question 4

What is the exchange rate?

Answer 4

The value of one currency expressed in terms of another

Question 5

What are the reasons exchange rates fluctuate?

Answer 5

Changing demand for a currency

Economic growth

Changes to interest rates

Question 6

What is the impact on businesses of appreciation (an increase in the value of the pound against other currencies) on both importing and exportation businesses?

Answer 6

The impact of exporting businesses:
Sales are likely to fall ad products become more expensive when compared to overseas competitors

In order to remain competitive exporting businesses may need to lower prices and accept lower profit margins

The impact of importing businesses:
Costs are likely to fall as supplies from overseas become cheaper when compared to those domestically-produced

Businesses may seek to expand the pool of overseas suppliers to further reduce costs and maximise profits

Question 7

What is the impact on businesses of depreciation (a decrease in the value of the pound against other currencies) on both importing and exporting businesses?

Answer 7

The impact of exporting businesses:
Sales are likely to rise as products become cheaper when compared to overseas competitors

Businesses may choose to increase selling prices to increase profit margins

The impact on importing businesses:
Costs are likely to rise as supplies from overseas become more expensive when compared to those domestically-produced

Businesses may seek domestic suppliers to reduce costs and maintain profit levels

Question 8

What is the interest rate?

Answer 8

A percentage reward offered for saving money and the percentage charged for borrowing money

Question 9

What does its interest rates mean for businesses?

Answer 9

They will have to pay more on new or variable rate borrowing, which will increase costs

Therefore Businesses may be less willing to make capital investments when their retained profit may be more profitably invested into savings schemes

Customers are less likely to purchase goods on credit when interest rates are high leading to a fall in sales

Exporting businesses may see demand for their products overseas fall as higher interest rates usually strengthen the value of the domestic currency and make their products comparably more expensive abroad

Question 11

What are indirect taxes?

Answer 11

Tax’s levied on spending, e.g. value added tax

Question 12

What is the impact of an increase in taxation on revenue?

Answer 12

Revenue may fall for many businesses

Increased income tax will reduce the disposable income of customers and demand for products may fall

Increased VAT will make products more expensive and customers may switch to alternative products

Question 13

What is the impact of an increase in taxation on costs?

Answer 13

Operating costs will as a result of increased taxes such as VAT and National Insurance contributions

Higher costs may be offset by charging higher prices

Higher prices may lead to lower sales and profit may fall

Import costs are increased when custom duties are raised (tax’s on imported goods)

Question 14

What is the impact of an increase in taxation on business decisions ?

Answer 14

Business spending and investment may be affected by increased in corporation tax as less profit will be retained to cover future expenses and make plans for business expansion.

Operational decisions may be affected by increases in business rates and taxes related to employing workers

In some cases businesses may take steps to try to avoid paying specific taxes or pay lower rates of taxation

Move the business to a low-tax location

Change production methods to reduce the use of highly-taxed components

Question 15

What is increased government spending usually funded by?

Answer 15

Increases in tax or increases in public sector borrowing

Increased investment spending (e.g. on roads or regeneration) can encourage businesses to invest and lead to economic growth
Increased public sector spending can lead to targeted improvements (e.g in public health or education levels) that can improve productivity

Question 16

What does the business cycle show?

Answer 16

The upturns and downturns in the level of a country’s economic activity (GDP) over time

Question 17

When does a recession occur and what are the characteristics?

Answer 17

Occurs when an economy experiences two consecutive quarters or more of negative economic growth

Characteristics:
Increasing/high unemployment
Low confidence for firms/households
Low inflation or deflation
Increase in government expenditure

Question 18

What is a boom and what are the characteristics?

Answer 18

A period of time where an economy experiences increasing/high rates of economic growth

Characteristics
Decreasing unemployment and increasing job vacancies
High confidence and more risky decisions taken
Increasing rate of inflation
An improvement in the government budget as tax revenues rise and government expenditure falls

Question 19

What is the impact of recession on businesses?

Answer 19

Customers have less disposable income and are likely to reduce spending or postpone significant spending decisions, leading to lower revenue

Businesses may find it relatively easy to recruit workers from a larger pool of candidates

Businesses may delay spending decisions and focus on reducing risk and survival

Production levels are likely to be reduced

Businesses often stockpile products

Increased spending on welfare benefits and spending on infrastructure projects to inject demand into the economy may benefit some businesses

Question 20

What is the impact of a boom on businesses?

Answer 20

Customers’ disposable income increases leading to higher sales revenue

Recruitment and staff retention may become more challenging and businesses may need to pay higher wages

Businesses look to expand and maximise profit

Production levels are likely to increase

Product or market development strategies are more likely

Interest rates are likely to rise and the higher cost of borrowing will increase the risk of capital investment
Lower government spending may impact on business growth plans

Public sector pay controls may cause Industrial unrest and affect business operations

Question 21

When does economic uncertainty occur>

Answer 21

When it is difficult to forecast the level of supply and demand in an economy

Question 22

What are direct taxes?

Answer 22

Taxes levied on income (e.g. income tax and corporation tax)

Question 22

Wat will economic uncertainty occur as a result of?

Answer 22

Fluctuating exchange rate

Economic growth uncertainty

Turbulence in the price of key commodities such as oil

Question 23

How can businesses prepare for economic uncertainty?

Answer 23

By:
Building up cash reserves when times are good

Keeping informed about the economic climate

Being ready to take advantage of opportunities when they arise

Question 24

What is legislation?

Answer 24

Laws and regulations passed by governments that require businesses and individuals to conduct their behaviour in a particular manner

Question 25

What are the 5 areas of legislation that have significant impacts on businesses?

Answer 25

Consumer protection Employee protection Environment protection Competition policy Health and safety

Question 26

What are The effects on businesses of consumer protection laws

Answer 26

Consumer protection legislation aims to ensure that consumers are treated fairly by the companies with which they interact Covers the areas: - the safety of products - the standard and quality of products - the rights of customers if they are unhappy with their purchase - the product information that must be given to customers. Meeting the requirements of each of the above laws results in increased business expenditure, which may reduce profitability

Question 27

What do Consumer protection legislation aims to provide?

Answer 27

Consumer protection legislation aims to provide a level playing field for businesses, ensuring that no business can gain an unfair advantage over rivals by taking shortcuts or by making false claims about its products

Question 28

What are The effects on businesses of employee protection laws?

Answer 28

Employee protection legislation aims to prevent the exploitation of workers Covers: - pay and working conditions - equality of employment rights for marginalised groups (e.g. those with disabilities) to avoid discrimination - the right to belong to a trade union (an organised association of workers in a trade or profession, formed to protect and further their rights and interests.) and take industrial action (Where trade union members, in dispute with management, protest or take action such as strikes to achieve their aims.) - contracts and termination of employment

Question 29

What are The effects on businesses of environmental protection laws?

Answer 29

Environmental legislation aims to hold businesses responsible for their environmental impact Covers: - pollution - destruction of wildlife - traffic congestion - air quality - resource depletion Businesses that fail to adhere to these laws may be fined or forced to cease commercial activity until they resolve problems they have caused

Question 30

What are The effects on businesses of competition policy laws?

Answer 30

Competition legislation aims to protect the interests of both consumers and businesses by restricting anti-competitive practises Covers: - abuse of market power so as to limit monopoly power - anti-competitive acquisition activity (When one company purchases most or all of another company's shares to gain control of that company.) - cartel (Where a group of businesses collude with each other in order to improve their profits and dominate the market.) activity and collusion.

Question 31

What are The effects on businesses of health and safety legislation?

Answer 31

Health and safety legislation requires businesses to operate in a way that protects the physical and mental wellbeing of its employees and contractors, as well as its customers Covers: - the provision of adequate breaks and rest periods - temperature and noise levels - the provision of safety equipment - hygienic, safe and sanitary conditions - preventing stress Implementation of procedures and equipment required to maintain healthy and safe business premises and working conditions are likely to incur financial and time costs

Question 32

What does the competitive environment concern?

Answer 32

the degree to which a business is affected by rivals that operate in the same market

Question 33

What does the threat competition present?

Answer 33

to businesses operating in a market will determine how quickly the business responds The greater the threat, the quicker the response required - and vice versa

Question 34

What is market size?

Answer 34

The number of customers and sellers in a particular market.