Transcript Economics considerations for new and existing businesses

ECONOMICS CONSIDERATIONS
FOR NEW AND EXISTING
BUSINESSES
Economic factors to consider
 Inflation
 Changes in the Interest rate (Monetary
Policy)
 Unemployment
 Exchange Rate
 Taxation (Fiscal Policy)
Government Objectives
 Stable Prices
 Economic Growth
 Low unemployment
 Increase the standard of living
The State of the Economy
 Consumers buying behaviour will be
influenced by whether the economy is in
recession or not.
 Recession is believed to be occurring when
GDP falls for 2 consecutive quarters
 Consumer confidence also has a large
psychological affect on the economy
The backdrop
 The Government would like to increase GDP
or output or Aggregate Demand therefore
helping business and individuals
 AD= C+I+G+(X-M)
 Consumption + Investment + Gov Spending +
Exports minus imports
Changes in Interest Rates
 Definition: is the price charged by a bank per
year for lending money. This is greatly
influenced by the Bank of England’s Base
rate. In the UK the base rate is 0.5%
Why is the Interest Rate so
Important to business?
 1. The interest rate effects consumer demand for
goods bought on credit like cars or houses.
 2. Affects operating costs for a business. It
therefore makes running a bank loan or credit
card or overdraft more expensive. This will lower
profit or lead to firms increasing prices.
 3. If there is expectation or an increase in the
interest rate it discourages firms from investing
in capital goods like machinery.
 If interest rates fall the opposite is true
Changes in Interest Rates
affects
 The C and I in the formula :
 AD = C+I+G+(X-M)
Exchange Rates
 The exchange rate measures the quantity of
foreign currency that can be bought with one
unit of domestic currency.
Appreciation or rise of a
currency
 For example £1=$1.50 goes to £1=$2
 For importers of goods and services its good.
Cost of goods goes down.
 For exporters they become less competitive.
 Importers of cars $10,000
 Exporters of cars £10,000
Depreciation or fall in the
value of a currency
 Bad for importers as costs rise and leads to
inflationary pressures on goods and services
 Good for exporters as they find their goods
becoming more competitive
How does unemployment affect
business?
 Unemployment is when the number of jobs (
demand for labour) falls in comparison with
people looking for jobs.
 If an area of a country has high
unemployment then people will generally
demand less goods .
 Starting a business in times of high
unemployment can be risky
 Different parts of the UK have different rates
of employment
 Often business can expand production in
areas of high unemployment and then sell to
other markets.
 In boom jobs are available . However, in a
recession the demand for jobs is low.
 The demand for jobs in foreign countries
compared to the UK
 The amount of benefits available
What is inflation and how does
inflation affect a business?
 Definition : measures the percentage annual
rise in the average price level
Advantages to business?
 Inflation can boost record profitability.
Inflation makes the business appear that it
has increased profitability.
 Firms with large loans benefit from inflation
because it erodes the value of the loan.
Disadvantages of Inflation
 Inflation can damage profitability of a
business especially if it is a fixed rate
contract. Costs could dramatically increase
over the contract term
 Pushes costs up , particularly buying new
machinery
 If UK inflation is rising faster than other
countries business will find it difficult to
compete.
 Costs incurred when changing price lists
constantly.
Government Spending and
Taxation
 Increase in tax could be damaging to business
believing that long term gain is more
favourable .
 40% of the UK economy is generated by the
Government so an increase in spending can
boost economic activity.
Finally
 Economic factors will affect different
businesses in terms of
 Size
 What the business does
 Strengths and Weakness
The UK
 GDP = Target 0%
 Inflation = 2.4% in June 2012 ( Target 2%)
 Unemployment = 2.59m
 Interest Rate ( base rate ) = 0.5%
How will economic factors in the UK
affect the following businesses:
 Apple and the release of the iphone 5 in the
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UK
BA ( British Airways)
Virgin Ltd
Dyson
A small plumbing business
A local Italian Restaurant
Tasks
 1. Check the current values of
 UK base rate
 £ against the $
 UK level of unemployment
 Latest GDP data
 2. Can you find evidence to suggest whether
the prevailing economic climate is currently
optimistic or pessimistic? Do the values you
checked have any link to the current
economic climate?
 3. Check your grasp of policy options by
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deciding which way each of the following
could be changed to encourage lower
unemployment
Income tax
Government spending
Interest rates
Exchange rate of the pound