Borja Jimenez Business A-level
EXTERNAL INFLUENCES (5)
UNIT 2
Table of Contents
EXTERNAL INFLUENCES (5)..........................................................................................................................1
ECONOMIC INFLUENCES (41)...................................................................................................................1
INFLATION...........................................................................................................................................1
EXCHANGE RATES................................................................................................................................2
INTEREST RATES...................................................................................................................................3
TAXATION............................................................................................................................................4
GOVERNMENT EXPENDITURE..............................................................................................................5
THE BUSINESS CYCLE............................................................................................................................5
LEGISLATION (42).....................................................................................................................................5
COMPETITION POLICIY.........................................................................................................................7
HEALTH AND SAFETY............................................................................................................................7
THE COMPETITIVE ENVIORNMENT (43)...................................................................................................8
ECONOMIC INFLUENCES (41)
These factors are not directly related to the business but influence the investment value in the future.
INFLATION
General rise in prices and associated fall of the value of money; a sustained rise in the general price
level. A fall in the general price level is known as deflation.
It is measured by using a CPI; consumer price index. This involves gathering information about the prices
of goods and services in the economy
IMPLICATIONS ON BUSINESSES
Increase costs: high or fluctuating inflation imposes a variety of costs on businesses
o Costs of raw materials may rise; higher payments to suppliers
o If businesses raise prices, customers will have to be informed. All processes involved will
involve additional costs for businesses
o Business’s HR team might also invest more time into dealing with labor relations (trade
unions).
Uncertainty: issues may rise when business consider investing in assets or setting long-term
contracts. With high and fluctuating inflation, businesses don’t know what future prices will be
Borrowing and lending:
o Borrowers may benefit as the value of their loan decreases
1
, Borja Jimenez Business A-level
o In an inflationary environment, interest rates rise to match inflation. If there is
prolonged inflation, interest rates are likely to become index linked; linked to the index
of prices
Consumer reactions: prolonged inflation tends to make citizens less confident and uncertain
about possible future consequences; they normally avoid heavy expenditure and borrowing and
instead encourage saving.
International competitiveness: high inflation can have an impact on businesses that import or
export goods and services. High inflation can negatively affect domestic businesses as imports
become relatively cheaper.
BUSINESS RESPONSE TO INFLATION
Search for cheaper supplies
Increase prices; this will help to compensate from higher costs and less demand
Negotiate with employees; employees may demand for higher wages due to inflation’s impacts
Build up inventories; products can be sold at future higher prices
Outsource or relocate
EXCHANGE RATES
This is the value of one currency for the purpose of conversion to another.
Depreciation: a decrease in the value of a currency relative to other currencies; a fall in the
exchange rate
o Impact on exports: price of exports will be lower; lead to a higher demand for such.
o Impact on imports: price of imports will rise; demand will decrease
Appreciation: an increase in monetary value; a rise in the exchange rate
o Impact on exports: price of exports will rise; demand will fall.
o Impact on imports: price imports decrease; lead to an increase in demand
BUSINESSES RESPONDS TO EXCHANGE RATES
Appreciation:
o Export businesses: Prices for their products will rise. They might respond by lowering
prices in order to compensate for such increase. Other factors such as improving quality,
customer service, offering favorable payment terms or rewarding loyalty will be used as
an effort in retaining overseas customers
o Import businesses: generally, these will benefit. Goods form overseas will become
cheaper. They may respond by building up inventories, lowering prices or even consider
expanding their operations
Depreciation:
Export businesses: prices for their products will be lower for overseas customers. They may
respond by raising prices to increase profit margins, lowering prices to boost overseas sales or
expanding operations to consider rapid growth
Import businesses: higher prices when they buy from abroad. May be forced to accept lower
profit margins or raising prices
2
EXTERNAL INFLUENCES (5)
UNIT 2
Table of Contents
EXTERNAL INFLUENCES (5)..........................................................................................................................1
ECONOMIC INFLUENCES (41)...................................................................................................................1
INFLATION...........................................................................................................................................1
EXCHANGE RATES................................................................................................................................2
INTEREST RATES...................................................................................................................................3
TAXATION............................................................................................................................................4
GOVERNMENT EXPENDITURE..............................................................................................................5
THE BUSINESS CYCLE............................................................................................................................5
LEGISLATION (42).....................................................................................................................................5
COMPETITION POLICIY.........................................................................................................................7
HEALTH AND SAFETY............................................................................................................................7
THE COMPETITIVE ENVIORNMENT (43)...................................................................................................8
ECONOMIC INFLUENCES (41)
These factors are not directly related to the business but influence the investment value in the future.
INFLATION
General rise in prices and associated fall of the value of money; a sustained rise in the general price
level. A fall in the general price level is known as deflation.
It is measured by using a CPI; consumer price index. This involves gathering information about the prices
of goods and services in the economy
IMPLICATIONS ON BUSINESSES
Increase costs: high or fluctuating inflation imposes a variety of costs on businesses
o Costs of raw materials may rise; higher payments to suppliers
o If businesses raise prices, customers will have to be informed. All processes involved will
involve additional costs for businesses
o Business’s HR team might also invest more time into dealing with labor relations (trade
unions).
Uncertainty: issues may rise when business consider investing in assets or setting long-term
contracts. With high and fluctuating inflation, businesses don’t know what future prices will be
Borrowing and lending:
o Borrowers may benefit as the value of their loan decreases
1
, Borja Jimenez Business A-level
o In an inflationary environment, interest rates rise to match inflation. If there is
prolonged inflation, interest rates are likely to become index linked; linked to the index
of prices
Consumer reactions: prolonged inflation tends to make citizens less confident and uncertain
about possible future consequences; they normally avoid heavy expenditure and borrowing and
instead encourage saving.
International competitiveness: high inflation can have an impact on businesses that import or
export goods and services. High inflation can negatively affect domestic businesses as imports
become relatively cheaper.
BUSINESS RESPONSE TO INFLATION
Search for cheaper supplies
Increase prices; this will help to compensate from higher costs and less demand
Negotiate with employees; employees may demand for higher wages due to inflation’s impacts
Build up inventories; products can be sold at future higher prices
Outsource or relocate
EXCHANGE RATES
This is the value of one currency for the purpose of conversion to another.
Depreciation: a decrease in the value of a currency relative to other currencies; a fall in the
exchange rate
o Impact on exports: price of exports will be lower; lead to a higher demand for such.
o Impact on imports: price of imports will rise; demand will decrease
Appreciation: an increase in monetary value; a rise in the exchange rate
o Impact on exports: price of exports will rise; demand will fall.
o Impact on imports: price imports decrease; lead to an increase in demand
BUSINESSES RESPONDS TO EXCHANGE RATES
Appreciation:
o Export businesses: Prices for their products will rise. They might respond by lowering
prices in order to compensate for such increase. Other factors such as improving quality,
customer service, offering favorable payment terms or rewarding loyalty will be used as
an effort in retaining overseas customers
o Import businesses: generally, these will benefit. Goods form overseas will become
cheaper. They may respond by building up inventories, lowering prices or even consider
expanding their operations
Depreciation:
Export businesses: prices for their products will be lower for overseas customers. They may
respond by raising prices to increase profit margins, lowering prices to boost overseas sales or
expanding operations to consider rapid growth
Import businesses: higher prices when they buy from abroad. May be forced to accept lower
profit margins or raising prices
2
