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

 The C and I in the formula :  AD = C+I+G+(X-M) Changes in Interest Rates affects

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 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 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