Slides in this set
Implications for business strategy of macroeconomic
· Interest rates: the cost of borrowing money and the return for lending money.
· Effects of a fall in interest rates: - increase in demand for consumer goods.
increase in demand for capital goods. fall in export prices and rise on import
prices. fall in costs and rise in profits.
· Effects of a rise in interest rates: - savings are more attractive. demand for
consumer goods brought on credit fall. people with loans/morgages have less
disposable income. investment in capital projects and machinery fall. value of
the pound rises.
· Exchange rates: the price of one country's currency in terms of another. There are
exchange rates for pounds sterling against all other currencies.
· Businesses affected by exchange rates: - businesses that export their goods to
consumers in other country's. sell their goods in the UK, competing against
foreign imports. businesses that purchase imported fuel, raw materials and
components to use in production of their own goods.
· Effects of an increase in exchange rates: - demand for exports that are inelastic, an
increase in their price will have little effect on sales. Although it will increase
revenue in terms of foreign money. demand for exports that are elastic, huge fall
· Problems of fluctuating exchange rates: businesses cannot predict their revenue
as the exchange rate is constantly changing.…read more
· Inflation - A persistent increase in the level of consumer prices or a persistent decline in the
purchasing power of money caused by an increase in available currency and credit beyond
the proportion of available goods and services.
· Over the long term, inflation erodes the purchasing power of your income and wealth.
· That means that even as you save and invest, your accumulated wealth buys less and less.
· How to measure Inflation
· Every month the Government surveys prices and generates the current consumer price
· This allows you to compare current figures with past figures
· Causes of Inflation
· Inflation results when the macro economy has too much demand for available production.
· Demand-Pull Inflation: This inflation occurs when the government / consumers / business
try to purchase more output than the economy is capable of producing.
· Cost-Push Inflation: Cost-push inflation is inflation due to decreases in supply, primarily due
to increases in production cost
· Inflation and Business
· Inflation may lead to a decrease in sales for businesses
· When there is high inflation it is hard for business to remain competitive especially with
· Inflation and Government Policy
· Governments try and control inflation using the following tools:
· - An increase in interest rates
· - Legislation reducing trade union power
· - Reduced expectations of inflation allowing businesses more confidence when setting prices…read more
·There are a number of types of unemployment:
·- Structural unemployment
·- Cyclical unemployment
·- Frictional unemployment
·Occurs when the economy changes and industries die out
·Training is needed to give the unemployed workers new skills
·Structural unemployment can affect businesses in the local area
·Caused by the business cycle
·Cyclical unemployment can lead to a decrease in sales meaning businesses need to look for new
·Caused when people are temporarily out of work as they are moving jobs
·Businesses can also incur problems due to falls in the level of unemployment as there may be skills
and labour shortages
·If this is the case businesses can:
·- Switch to capital intensive manufacturing systems
·- Relocate overseas to exploit cheaper and more plentiful labour
·- Invest in training schemes to develop employees skills…read more
·The value of a nation's currency in terms of another currency i.e. £1=$2
·An exchange rate is set by demand and supply of a currency
·Exchange rates create uncertainty because:
·- If a deal is agreed in foreign currency firms may receive more or less than expected
due to changes in exchange rates
·- Changes to exchange rates can affect prices and sales overseas
·- Competitors can respond in unexpected ways to exchange rate changes
·Changes in the UK's interest rates will lead to changes in the exchange value of the
·If interest rates rise the value of the pound will rise so the pound will now buy more
US dollars, Japanese Yen, Euros etc.
·If interest rates fall the value of the pound will fall so the pound will now buy less US
dollars, Japanese Yen, Euros etc
·If interest rates are higher than rates in other countries the UK will become more of
an investment opportunity.
·Investors will exchange their currency into sterling to invest it in UK banks to earn
high rates of interest on their savings.
·This will increase the demand for Sterling which will appreciate in value
·If interest rates are lower than rates in other countries the UK will become less of an
·Investors will exchange their currency from sterling to invest it in Foreign banks.
·They will withdraw £ in the UK to buy foreign currency.
·This means an increased supply of sterling will be available in the world's currency…read more
· With the growth of free trade businesses now are
having to compete internationally
· This may be in order to increase profits and market
share, or simply to wider their customer base to
· In order to be competitive businesses must keep price
affordable but keep the quality and features
· Globalisation & Growth
· Many businesses have welcomed the concept of
globalisation as a chance to attract a wider audience
· Other businesses have failed in markets of increased