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1 Economic Factors Businesses are affected by the economy An economy describes how a country spends its money This is determined by 5 factors Economic Growth Exchange Rates Rates Economic Factors Inflation Balance of of Payments Unemployment Business Studies Online: Slide 1

2 Economic Growth This measures how much extra an economy has produced this year compared to last year The total amount produced in an economy is called: ross omestic roduct This means the total value of products produced within the UK Business Studies Online: Slide 2

3 The Business Cycle The growth of an economy will vary, but generally increases This is called the Business Cycle, and can be shown as: Income Trend is increasing growth Boom Recession Time Business Studies Online: Slide 3

4 Inflation Inflation is a general and sustained increase in prices In other words its when things get more expensive! It is measured by looking at the price of a basket of goods bought by most people each month It is quoted as a percentage annual figure E.g. inflation of 5% means that on average things are 5% more expensive now than they were this time last year The government will want inflation to be low in order to help businesses. Can you explain why low inflation helps businesses? Business Studies Online: Slide 4

5 Why is High Inflation Bad? Inflation can cause a number of problems: People try to save money, and so will spend less. This can create unemployment Higher prices means people are worse off Costs will be higher, forcing prices up further. If UK inflation is higher than elsewhere then UK companies will sell fewer goods abroad Business Studies Online: Slide 5

6 Unemployment Where people who want a job cannot get one It can occur for a number of reasons: Frictional People moving between jobs Structural Caused by major changes in the structure of the economy Cyclical Caused by changes in the business cycle Technological Caused by automation, where machines take the place of workers Seasonal Caused due to changes in the seasons, e.g. Alton Towers staff Business Studies Online: Slide 6

7 The Effects of Unemployment Unemployment can have good and bad effects on businesses: Effects of Unemployment Good More people looking for work Business has greater choice when recruiting Will be able to pay lower wages Bad People have less money to spend Demand will fall Profits may fall Business Studies Online: Slide 7

8 The Balance of Payments The balance of payments (BoP) measures the level of international trade that takes place. It is calculated as: Balance of Payments = Revenue from - Spending on Exports Imports Where: Exports are goods and services made in the UK but sold in foreign countries Imports are goods and services made in foreign countries but sold in the UK Business Studies Online: Slide 8

9 Deficit or Surplus? If more money is spent on our exports than we spend on imports then the BoP is in SURPLUS. Exports > Imports = Surplus If we spend more money on imports than we receive from exports the BoP is in DEFICIT. Exports < Imports = Deficit Business Studies Online: Slide 9

10 The Effects of International Trade International trade can create opportunities or threats for businesses Effects of International Trade Opportunities More potential customers Could buy materials from cheaper foreign suppliers Threats Increased competition from foreign firms Language and legal differences Increased transport costs Changes in the exchange rate Business Studies Online: Slide 10

11 Exchange Rates The exchange rate is: The price of one currency expressed in terms of another currency E.g. 1 = US$1.5 The most commonly quoted rates are: / $ (Pound Sterling against US dollar) $ / (US dollar against Japanese Yen) / (Pound Sterling against Euro) / (Euro) against Japanese Yen) Business Studies Online: Slide 11

12 What Determines Exchange Rates? Like most things, the value of a currency depends upon: The number of people who want to buy it (DEMAND) The number of people who want to sell it (SUPPLY) Changes in the exchange rate can have very big effects upon businesses: New Exchange Rate 1 = $2 British car sold in USA for: $40,000 ( 20,000 x 2) American car sold in UK for: 15,000 ($30,000 2) MADE IN THE UK MADE IN THE USA PRICE = 20,000 PRICE = $30,000 Original Exchange Rate 1 = $1.50 British car sold in USA for: $30,000 ( 20,000 x 1.5) American car sold in UK for: 20,000 ($30, ) Business Studies Online: Slide 12

13 How Exchange Rates Affect Businesses The effect upon a business depends upon whether the business buys and sells abroad In general: Affect on Imports into the UK Affect on Exports out of the UK Increase in Value of the pound Become cheaper so will increase Become more expensive so will fall Decrease in Value of the pound Become more expensive so will fall Become cheaper so will increase Business Studies Online: Slide 13

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