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Economic Influences on Business The Economy Economic Variable Present Rate Affect on the Economy Trade Cycle Interest Rate Exchange Rate Inflation Public Spending Tax . Evaluation-Affect on specific firms The Economy Economic Variable Present Rate Affect on the Economy Trade Cycle Recession Investment, consumer spending down. Unemployment high, business profits falling closure rising. Interest Rate Low – base rate 0.5% Encourages spending, borrowing and investment. Good for business. Exchange Rate £1: euro 1.2 £1: $1.5 £ weak Weak pound, generally good for exporters, imports more expensive. Inflation Last year 5% Present fallen to 3.0% Fairly high Cut in peoples’ living standards, workers’ demand higher wages, higher cost of raw materials. Particularly detrimental for firms where unions are strong or where goods are rising rapidly e.g. oil, hence transport Large cuts Reduced spending in the economy, unemployment, recessionary effect It will hit construction hard and businesses dependent on public sector contracts Public Spending Tax Increased to VAT 20% Reduces spending Evaluation-Affect on specific firms Little affect on necessities Capital/luxury adversely affected Slight increase for inferior Good for companies with high debt. More goods bought on credit. Positive for UK exporters Detrimental for UK importers such as Matalan Retail The Economy Economic Variable Present Rate Affect on the Economy Trade Cycle Recovery 2.5% Growth Investment, consumer spending increasing. Unemployment falling, business profits rising. Interest Rate Low – base rate 0.5% Encourages spending, borrowing and investment. Good for business. Exchange Rate £1: euro 1.2 £1: $1.5 £ weak Weak pound, generally good for exporters, imports more expensive. Has been high at 5% now low at just over 0% This has stopped eroding the value of peoples’ real wages. Allows firms to forecast and price more accurately. Inflation Public Spending Large cuts Tax VAT 20% Reduced spending in the economy, unemployment, recessionary effect Reduces spending Evaluation-Affect on specific firms Little affect on necessities Capital/luxury starting to pick up after recession Inferior still doing well after rec. Good for companies with high debt. More goods bought on credit. Positive for UK exporters Detrimental for UK importers such as Matalan There has been falling prices in oil that has hit the oil companies, but benefited most other companies e.g. airlines, even supermarkets It will hit construction hard and businesses dependent on public sector contracts Retail