1-5-4-The-Economy-And-Business

The impact of the economic climate on businesses

• The economic climate refers to the broad performance of the UK economy, as measured by changes to GDP growth

  • When GDP growth is increasing, incomes may increase, spending on goods/services increases, inflation may rise and unemployment may fall

  • When GDP growth is decreasing, incomes may fall, spending on goods/services falls, inflation may fall and unemployment may rise 

The growing economy

• Economic changes can present significant opportunities and threats to business activities 

• Businesses need to anticipate and respond to changing economic variables to maximise their chance of success

• The following economic variables need to be considered

  • Changes to inflation, unemployment, exchange rates, household income, interest rates, and government taxation

The business impact of changes in consumer income

• When household income rises, the impact on businesses will depend on the nature of the goods/service that they sell

  • Firms which sell inferior goods will see a fall in demand and sales revenue will fall

  • Firms which sell normal goods and luxuries will see an increase in demand and sales revenue 

• When household income falls, the impact on businesses will depend on the nature of the goods/service that they sell

  • Firms which sell inferior goods will see an increase in demand and sales revenue will rise

  • Firms which sell normal goods and luxuries will see a decrease in demand and sales revenue

The business impact of changes in inflation

• Inflation is the general rise in prices in an economy over time (measured using the consumer price index) 

UK inflation over time

• After several decades of relatively low levels of inflation the UK has recently experienced rapidly increasing levels of inflation

  • This has caused large scale disruptions in the economy as many workers are striking to attempt to secure higher wages

Business challenges caused by inflation

The business impact of changes in exchange rates

• The exchange rate is the value of one currency expressed in terms of another

• Exchange rates are an important economic influence for businesses that import  raw materials and components and for businesses that export their products 

• The value of a currency can appreciate or depreciate over time 

The impact on business of currency appreciation and depreciation

The business impact of changes in interest rates

• The interest rate is a percentage reward offered for saving money and the percentage charged for borrowing money

• Lenders commonly charge interest on borrowing at a higher rate than the rate offered to customers for savings and investments 

• If interest rates rise businesses will have to pay more on their loan repayments which will increase their costs

• Businesses may be less willing to make capital investments choosing instead to save their money

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

The business impact of changes in taxation

• Governments impose direct and indirect taxes on businesses and households

  • Direct taxes are levied on income e.g. Income tax and Corporation Tax

  • Indirect taxes are levied on spending e.g Value added tax (e.g. VAT) 

The impact of an increase in taxation

The business impact of changes in unemployment

• The impact on business of changes in the unemployment rate will depend on the type of skill required by the business

• As the unemployment rate falls, businesses have to pay more to secure skilled workers

  • The less the supply of skilled workers, the higher the salaries they will have to offer

• As the unemployment rate falls, businesses may have to pay more to secure unskilled workers

  • The less the supply of unskilled workers, the higher the wages they will have to offer

  • The increase in wages for unskilled workers will depend entirely on how limited the supply of unskilled workers is 

• Generally, the higher the unemployment rate, the cheaper a business can secure labour – and vice versa

• Labour costs are amongst the most significant for many businesses, so the unemployment rate can have a direct impact on the profitability of the business