AS Business: Economic factors affecting business

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The interest rate is the price charged by a bank per year for lending money or for providing credit.
For firms, the level of interest rates is very important because:
It affects consumer demand, especially for goods bought on credit ­ if interest rates increase households decide to save more and spend less and
vice versa. It affects the amount of disposable income a consumer has.
The interest charges affect the total operating costs, if interest rates fall businesses have to pay less interest on their loans.
Price of one currency expressed in terms of another. E.g. the pound's rate against the US dollar id determined by the supply and demand for the pound
on international currency markets.
Strong Pound
Imports Cheaper Exports
Inflation measures the percentage annual rise in the average price level.
Advantages of inflation to a business:
It makes real assets become worth more. As a result the firm might find it easier to raise long-term finance from banks and shareholders because
the business now looks more secure.
Firms with high borrowings find that the fixed repayments on their long term borrowings become more easily covered by rising income and profits.
Disadvantages of inflation to a business:
Can damage profitability, especially for firms that have fixed-price contracts that take a long time to complete.
Can damage cash flow as it will push up the price of machinery.

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Differences in inflationary expectations have the potential to cause costly industrial disputes that may damage a firm's reputation.
Created when the demand for labour has fallen relative to the available supply of labour.
Theory X managers might use the fear created from unemployment to force through cost saving changes in working practices.
Employees choose to stay where they are creating low rates of labour turnover and saving the firm money on recruitment, selection and training.…read more


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