The Relationship Between Business And The Economic Environment

1320 words - 6 pages

Economic Growth- GDP
Economic Growth…
…An increase in an economy’s ability to produce goods and services
Gross Domestic Product- represents the value of a country’s national income in one year.
An increase in real GDP means that the standard of living within a country is increasing. It is therefore used as a way of measuring a country’s economic growth.

The Business Cycle- there are discernable patterns in these levels over time, there will be periods of time when economic activity is rising and other times when the level of economic activity slows down.
The Business Cycle
The Four Stages of the Business Cycle are:
Boom: A period of very fast economic growth, with rising incomes ...view middle of the document...

Possible strategies during recovery:
• Expand production capacity
• Develop new products that will be in greater demand as income rise
• Increase employment and open up new locations

Interest Rates…
…The price of acquiring capital
Interest rate rise
• UK becomes more attractive for foreign investors
• Foreign investors purchase pounds to invest in UK financial institutions
• Demand for pound increases, causing the exchange rate to increase in value
Interest rate fall
• UK becomes less attractive for foreign investors
• Foreign investors sell pounds to purchase other currencies that have a higher return
• Demand for pounds falls, causing the exchange rate to fall in value
The effect of changes in interest rates on business
An increase in interest rates
• An increase in cost- interest on loans will rise
• Businesses with investments might find returns increasing
• As the cost of servicing debt rises. Businesses have to consider whether to pass on rises to consumers in the form of higher prices
• Some businesses many cut costs in other areas to compensate
• Consumer spending will tend to slow down and may affect sales
• The exchange rates many strengthen-
➢ Importers benefit from lower import prices
➢ Exporters find that that they are less competitive
A fall in interest rates
• A fall in costs- interest on loans will decrease
• There is an incentive to borrow for investment as interest rates are lower
• Lower interest rate may encourage increased consumer spending
• Businesses have to be prepared for possible increases in demand
• The exchange rate may weaken
➢ Importers find the cost of imported raw materials etc will increase
➢ Exporters find they are more competitive

Exchange rates…
…The price which has to be paid to buy a currency, expressed in terms of the amount of another currency that has to be given up.
The exchange rate is determined by the demand and supply of different currencies on the foreign exchange markets which specialise in dealing with foreign currency transaction.
One of the factor that influence the demand for a currency on the market is changes in interest rates. If the foreign exchange markets anticipate a rise in the UK interest rates it tends to have the effect of increasing the value of the pound. This is because investors will look to buy UK assets since they now command a higher return. As the demand for sterling rises it pushed up the exchange rate.
When the exchange rate alters it affects the degree to which firms are competitive in foreign markets, and also affects the cost of imports of raw materials, components and semi-finished products as well as foodstuffs. If the pound rises in value compared to the euro or the dollar, for example, it means that exporters will find that they are less competitive since foreign buyers now have to give up more euro or dollars to buy the same amount of pounds. To those foreign buyers it seems like the goods and services have...

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