How do economic variables affect a business?

Interest rate - this is referred to as the price of money - the cost of borrowing or reward for saving money.

How do interest rates affect a business?

• Gearing - firms that have a high gearing are very sensitive to interest rates. This means that firms with more money (50%+) from borrowings than shareholders are likely to experience higher payouts in interest, leading to their overall costs increasing.
• Supply - if the cost of borrowing increases it becomes more expensive to invest in capital equipment. This means that business to business transactions will decline as firms buy less capital goods and there will be less capacity in the economy.

How do interest rates affect a business?

• Demand - higher interest rates mean that consumers will have higher mortgage repayments (for example). This means that they will have less disposable income and therefore there will be a fall in demand for luxury goods and an increase for inferior goods. In addition, people are also less likely to borrow money from the bank.
• Exchange Rates - higher interest rates attract foreign investors to invest into UK banks as they will get a higher rate of return. An increase in demand for the £ caused by this, will lead to it's value appreciating and therefore leading to exports becoming more expensive.

How do interest rates affect consumer spending?

• Gross wage - compulsory deductions e.g. tax, NI and pensions = NET wage (disposable income).
• Net wage - compulsory payments e.g. mortgages, loan repayments and insurance = discretionary income.

... as interest rates increase, our discretionary income falls. Therefore interest rates also affect our ability and willingness to buy on credit.

Unemployment - people who are looking for work and cannot find a job.

How does unemployment affect a business?

• Demand - high unemployment leads to less demand for products and services as people with a less decent income are less likely to spend (especially luxury price elastic goods!) & vice versa.
• Skills shortage / surplus - too few workers will lead to less suitable skills for the position(competitive wages), too many there is plent of choice(low wages - lower costs,etc).
• High/Low costs - wage rates are affected by the number of people applying with the ocrrest skills for a position.

Types of unemployment...

• Structural - this occurs because of fundamental changes to the economy and whole industries are in decline.
• Cyclical - this is linked to the business cycle and refers to the position on the cycle. e.g. slump leads to high unemployment. (may be caused by mass redundancies in firms).
• Frictional - this occurs when people are unemployed as they are moving between jobs. With a job awaiting them, this type of unemployment doeen't have an impaxct on the economy as such.
• Seasonal - as we move through the seasons different kinds of jobs are created or lost. e.g. agricultural sector, tourism sector and festivities such as christmas.