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The Wider Economy & Business
External economic changes affect businesses directly or through customers.
Key influences: business cycle, government policy, interest rates, exchange rates, unemployment, inflation, GDP.
Key Economic Indicators & Business Impact
Employment Levels
↑ Unemployment → easier recruitment, but ↓ consumer income → ↓ sales.
Some businesses selling cheaper goods may see ↑ demand.
Inflation
↑ Costs → businesses may raise prices → ↓ sales.
Essential goods less affected; luxury goods more affected.
Workers may demand higher wages → ↑ costs.
GDP (Economic Growth)
↑ GDP → ↑ incomes → ↑ demand.
↓ GDP → unemployment, ↓ living standards, ↓ business expansion.
Government Economic Objectives
Low inflation
Low unemployment
Economic growth
Balance of payments stability
Fiscal Policy (Taxes & Government Spending)
Types of Taxes
Direct taxes: income tax, corporation tax.
Indirect taxes: VAT, sales tax.
Import tariffs: tax on imports.
Effects on Business
Income Tax
↑ Income tax → ↓ disposable income → ↓ sales (especially luxury goods).
Corporation Tax
↑ Tax → ↓ retained profit → ↓ expansion, ↓ investor returns.
Indirect Taxes
↑ Prices → ↓ demand (non-essential goods most affected).
Workers’ real incomes fall → pressure for wage increases.
Import Tariffs
Protect local firms (imports become expensive).
But ↑ costs for firms using imported materials.
Risk of retaliation from other countries.
Government Spending
↑ Spending → ↑ demand, ↑ jobs, ↑ GDP.
↓ Spending → negative impact on firms supplying public sector.
Monetary Policy (Interest Rates)
Higher Interest Rates
↑ Cost of borrowing → ↓ investment.
Consumers with loans have less income → ↓ demand.
↓ borrowing for expensive items (cars, houses).
↑ interest attracts foreign capital → currency appreciation → exports become expensive.
Supply-Side Policies
Aim: make economy more efficient & competitive.
Examples:
Privatization
Improved training & education
Encouraging competition (reducing controls, anti‑monopoly actions)
How Businesses React to Economic Policy Changes
↑ Income tax → lower prices, cheaper product lines.
↑ Tariffs → switch to local suppliers.
↑ Interest rates → reduce investment, sell assets.
↑ Government spending → target public-sector contracts.
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