Summary of 2.5 - External Influences

The Business Cycle
 Gross domestic product (GDP) is a measure of the total market value of  The
goods and services produced within a nation over a period of time. Topic 2.5 External Influences can
 The business cycle is a graph that shows how the GDP of an area changes com
over time – it shows booms, recessions, slumps, and recoveries. Exchange Rates & Inflation to o
BOOM RECESSION SLUMP RECOVERY  The exchange rate is the price of one currency expressed in terms of
 Ther
High rates of Output starts to Prolonged period Economy starts another. A UK firm will purchase a foreign currency in order to buy products
and services from overseas. It change owing to fluctuations in demand for chan
economic growth fall, growth of economic to pick up after
a currency, economic growth, and interest rates. and
and production decline decline a period of
decline  If the pound increases in value against other currencies it is said to 
strengthen. However, if the pound decreases in value against other 
 High profits  Production  High levels of  Increasing
declines as unemployment consumer currencies it is said to weaken. 
 Low
unemployment demand falls  High rates of confidence  Businesses will try to avoid uncertainty when exchange rates are volatile. 
 High inflation  Governments business  Firms start  Businesses may set an agreed rate for future transactions. 
 Shortages in use policies failure/closure to invest or  A firm may choose to target a specific international market (or economy) 
supply to stimulate  Low interest take on new when the exchange rate is favourable. 
growth. rates employees  Importers 
 Consumer  Low levels of  Spare  They may switch international suppliers when the exchange rate is less 
and firm spending and capacity is favourable.  Firm
confidence investment used up  They stockpile raw material and products when currency is strong. can
starts to fall.  Exporters  Com
 Firms make  Expansion  Firms adopt a  New firms  They lower prices to limit the impact of a strong currency.

strategic plans are strategy of start-ups  They increase promotion in foreign markets when currency is weak.

decision to ‘shelved’. rationalisation. emerge.  Inflation – the general rise in prices over time and is measured by the
consumer price index (CPI). A low rate of inflation can be managed by firms

expand into  Market  Functional  Business
new markets but a high rate of inflation will increase costs and reduce demand. 
penetration decisions may investment
through strategies include rises – HIGH INFLATION LOW INFLATION DEFLATION 
market become redundancies, product  Firms may increase  Firms feel confident  Firms may struggle  High
development. more scale down of development prices to pass costs in a stable to pay debts – actin
 Functional attractive as production strategy. on to consumers or economic assets may have to  The
decision to they are low and reduction  Firms take decide to absorb environment. be sold to pay off is no
expand risk. in capacity. on new the cost rises.  Firms may look to debts if deflation ther
workforce or  Firm  Firms reduce employees  Firms will look to invest and grow. persists. can
increase stockpile prices and and increase reduce internal  Low demand may  Ther
recruitment. products. focus on their contracts to costs to protect lead to depe
 Firms seek  Functions try most meet growth profits. redundancies and
opportunities to increase profitable in demand.  Price rises may fuel rationalisation.
for efficiencies efficiency product lines.  Functional further inflation.  Wid
and cost and cut  Firms may decisions  Les
reductions as costs, e.g. decide to focus on Government Spending, Taxation & Interest Rates ma
a result of

flexible cease trading ways to  Mo