Chapter 41- Economic Influences Flashcards
Interest rates
If business or individual borrows money, they usually pay interest on the loan, the same as if you put savings into a bank.
The interest rate is the price of borrowing or saving money e.g. if small business borrow £10,000 for one year = interest rate is 7%, has to pay £700 in interest.
Low interest rates = helpful, if high can damage business.
Monetary Policy
The use of interest rates to help control the economy. E.g. a government may raise interest rates to dampen demand in the economy if they thought that inflation was being caused by demand rising too quickly.
Effect of interest rates on investment
• The cost of loans- loans are used to finance investment = if interest rates increase then borrowing
money costs more = reducing profitability = decrease in investment.
• Attractiveness of saving- increase in interest rates = makes saving more attractive = business will
shelve investments in machinery + save money instead.
• Paying off existing loans- rise in interest rates = increase cost of variable rate borrowing =
business choose to pay off loans = reduces risk associated with borrowing.
• A fall in demand- rise in interest rates = likely to reduce spending in economy e.g. business might
forecast that project would be profitability with 20,000 sales a year but if projected sales were
only 15,000 then the investment would not be profitable therefore not be done.
Effect of interest rates on demand
• Stocks: businesses that holds stocks are likely to de-stock if interest rates increase because it will
cost more to keep stocks and demand is likely to decrease.
• Exports and Imports: Rise in interest rates = pound less valuable against another currency = fall in
exports and loss of sales to importers in domestic market = both reducing demand and hitting UK
businesses.
Taxation
Govs can influence business decision making using fiscal policy- involves changing taxation and government expenditure to influence economy.
• Consumer spending: if taxes are increased such as income tax then people will be left with less
money so will buy less however if taxes are decreased then people will be left with more people
after tax so may buy more.
• Prices: Increase in VAT tax will raise costs of the business = which is usually passed onto the
consumer = increased price of goods.
• Business costs, revenue and profits: increase tax, decrease in spending/ profits and revenue.
• Business spending + investment: more money spent on tax means less likely to invest in new
factories + machinery.
• Shares: changes in capital gains tax and stump duty might affect shareholders.
• Importing and exporting: If UK raised custom tax raised then UK businesses would have to may
more to import goods.
• Business operations and employees: changes in taxes = may employee less people if National
Insurance contributions of employees tax increases.
• Tax avoidance and evasion: increases in taxation often lead businesses to try to avoid paying tax.
E.g. dump waste.
Economic boom
GDP is growing because economy is performing well. Existing firms will be expanding and new firms entering the market.
- Demand will be rising, jobs created, wages will be rising + profits made by firms will be rising.
- However prices may be rising.
Downturn
Economy still growing but at slower rate.
• Demand for goods and services will begin to fall or flatten.
• Unemployment will rise
• Wage increases will slow down
• Firms stop expanding, profits will fall + some firms may leave the market.
• Prices will rise more slowly.
Recession or depression
Bottom of the business cycle GDP may be flat, GDP starts to fall = slump or depression.
- Associated with hardship
- Demand will fall for goods and services
- Unemployment will rise sharply
- Business confidence low
- Bankruptcies rise
- Prices become flat
Recovery or upswing
- when GDP starts to rise again
- Businesses and consumers regain their confidence and economic activity is on increase
- Demand starts to rise
- Unemployment begins to fall
- Prices start to rise again
