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Impact of economy on business Inflation Inflation is defined as the ‘sustained’ increase in the general level of prices of goods and services in the economy as measured by the consumer price index (CPI) Impact of High Inflation on Business Increase in the cost of production. Increased wage demands to keep up with rate of inflation. Increase in selling price of goods/services may lead to a fall in demand. Decline in sales/reduction in profit. Exports become less competitive because of increase in prices. Exports decrease. Benefits of Low Inflation on Business Improved competitive position on international trade – more goods sold abroad. Costs and wages will be more stable – lower wage demands. Higher consumer spending, increasing sales and profits. Increased tax revenue for government – more VAT from increased spending. Interest rates The interest rate charged by a financial institution for a loan is the price that has to be paid for the use of the money by the borrower. Impact of increasing/high interest rates on Irish business Increased cost of borrowing – expensive for people and business to borrow. Less investment/borrowing for expansion will be more expensive. Reduced consumer spending means reduced sales and reduced profits. Impact of low interest rates on Irish Business Businesses can borrow more easily – economic activity will increase. Encourages new investment as borrowing for expansion will be cheaper. Increased consumer spending means increased sales and increased profits. Taxation Tax is a compulsory contribution of money to the government and is paid by individuals and business. Impact of high taxes on business Income tax (PAYE) has the effect of reducing wages/salaries – people have less disposable income, leaving them with less incentive to work. An indirect tax such as VAT increases the cost of goods and services. Sales and profits fall. Corporation tax reduces company profit. Company has less money for investment/expansion. Lower dividends to shareholders. PRSI increases the cost of employing staff for business. How low taxation rates can help business Lower PAYE/PRSI rates – employees have more incentive to work Lower VAT rates – selling prices will be lower – more demand/more sales/more profits. Lower corporation tax rates – companies will make more profit/more money for expansion/investment. Lower PRSI rates/cost of employing staff is reduced. Unemployment Unemployment is the percentage of people in the labour force who are unable to find employment. Impact of rising unemployment on Irish economy More social welfare to be paid out by the government. Government revenue from taxation decreases, less PAYE/VAT Decrease in consumer spending/reduced sales/reduced profit. Possible higher taxes in the future to pay for increased government spending on social welfare. Workers become de-skilled if unemployed for a long time. Easier for businesses to find employees to fill job vacancies – wages will be lower Impact of low unemployment on Irish economy Wealth creation – more people have jobs and income. Increased demand for goods and services – increased consumer spending. More tax revenue for the government – PAYE, PRSI, VAT. Demand for labour may push up wages as firms must compete to attract skilled staff. Greater immigration into the country. Exchange rates The exchange rate is the price at which a currency can be exchanged for another. Exchange rates have a significant impact on companies that export large amounts of their output and on companies that import large quantities of raw materials. Impact of increasing value of euro against other currencies Exports: Irish exports abroad will be more expensive and less competitive. Irish exporters will find it more difficult to sell goods abroad. Sales and profits decrease. Imports: Price of imported goods will decrease. Irish people will buy more foreign goods. Irish firms will pay less for raw materials from abroad – reducing business costs. Impact of decreasing value of Euro against other currencies Exports: Irish exports abroad will be cheaper. Irish exporters will find it easier to sell goods abroad. Sales and profits increase. Imports: Price paid for imports will increase. Irish people will buy more Irish goods. Irish firm will pay more for raw materials from abroad.