GCE(A-level) ECONOMIC B Theme 1 - The wider economic environment

The wider economic environment                 

Impact of interest rates

Impact on business when interest rate increases:

1.   They are less likely to borrow money to expand due to higher cost of borrowing.

2.   They will face falling demand which reduces profits and eventually employment.

Impact on consumer when interest rate increases

1.   They are less likely to borrow money which reduces spend.

2.   Due to higher mortgage repayment, people get lower disposable income.

3.   People prone to save money rather than spend

Impact of taxation on business

An increase in taxation will decrease the demand for many products and services because taxation decrease purchasing power of consumer

Production costs can also be increased by cooperate taxes, VAT and excise duties.

 

 

 

Impact of unemployment on business

Rising unemployment

• As more people become unemployed, they have less income and so spend less. Therefore, demand for some businesses that sell luxury or non-essential items may fall.
• However, some businesses that sell inferior goods will have higher demand
• Businesses are easier to find people who have suitable skills.
• Due to higher supply of worker, wages rate is less likely to increase.

Impact of exchange rates on business

When the pounds appreciate:

1.   Exports become cheaper compared to import so export will increase, which cause surplus of current account.

2.   Increase in exports will create new jobs in domestic market.

3.   However, business that often use import resources will face higher production cost which decrease profit margin and demand. As a result, they will lose competitiveness against rival.

Impact of inflation rate on business

1.   It is hard to plan for the future when there is uncertainty so businesses are less likely to invest

2.   Production cost will be rose by wages and materials. This can reduce profitability unless the business charge higher price.

3.   Higher inflation rate than foreign competitors may causes loss of competitiveness and falling exports sales

Evaluation                                         

However, all policies will depend on PED, YED, type of main unemployment, type of taxation and extent of increased or decreased rate.