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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.