Economic Influences

• Inflation is the percentage rise in the average price level in an economy.
• The government estimates the average price level by looking at the price of a typical basket of goods and services.
• Inflation is calculated as the change in the price index over a given period.
• High or volatile inflation can be harmful to businesses due to uncertainty.
• Inflation at low and stable levels can be helpful to businesses.
• Exchange rates determine the price of one currency in terms of another currency.
• Appreciation in exchange rates is harmful for exporters but helpful for importers.
• Depreciation in exchange rates is helpful for exporters but harmful for importers.
• Interest rates are the cost of borrowing or the return from saving money.
• Lower interest rates lead to increased spending and investment
• Decreased interest rates benefit businesses and their profits
• Lower interest rates make borrowing cheaper for businesses
• Consumers are more likely to borrow and spend with lower interest rates
• Interest rates are balanced against the possibility of inflation
• The business cycle shows changes in GDP over time
• Government spending and taxation can impact businesses and the economy
• Uncertainty can negatively affect businesses and the economy

This module discusses the economic factors that can significantly impact a business’s success or failure, including inflation, exchange rates, interest rates, the business cycle, government spending and taxation, and uncertainty. Inflation is measured by tracking the change in prices of a basket of goods and services, and it is important to keep inflation under control to avoid uncertainty and negative effects on businesses. Exchange rates determine the price of one currency in terms of another, and appreciation or depreciation can affect exporters and importers differently. Interest rates, set by the central bank, impact the cost of borrowing and the return from saving. A decrease in interest rates leads to a decrease in the return from saving. Understanding these economic factors is crucial for businesses to navigate the challenges and opportunities they present.

The decision-making process between saving and spending money can have a significant impact on businesses and their profits. When interest rates decrease, it becomes cheaper to borrow money, reducing costs for businesses and making it easier for consumers to spend. This leads to increased spending and investment, benefiting businesses. However, low interest rates must be balanced against the risk of inflation. Central banks often lower interest rates during economic downturns to stimulate spending and growth, but they may increase rates to control inflation. The business cycle, which shows the regular changes in GDP over time, is influenced by consumer and business confidence. During periods of growth, output, employment, and spending increase, benefiting businesses. Conversely, during recessions, these factors decline, negatively impacting businesses. Governments can use spending and taxation to influence economic variables. Increased government spending boosts demand, GDP, and reduces unemployment, while tax cuts increase disposable income and encourage spending. However, governments must consider budget constraints and the risk of inflation. Uncertainty is a crucial factor that affects businesses’ ability to plan and make decisions. If consumers and businesses are uncertain about the future, they may delay spending and investment, which can negatively impact the economy. A stable and certain business environment is essential for businesses to thrive.