External Influences on a business

There are a number of varied external influences which affect decision making and a firms ability to meet their objectives. Some implications prove to be positive, whilst others are negative. How would a business react to such influences?

Interest Rates - The price of borrowed money The Monetary Policy Committe regularly alter these rates. What impact would these alterations have on a business?

A Rise in Interest Rates

(1)

• Reduce Spending
• Increase saving
• Prices of credit goods would rise
• Mortgage repayments would be higher
• Consumers would have a lower disposable income

(2)

• Businesses will face higher overheads
• Investments would be unviable
• There will be a higher demand for the pound, therefore more foreign investment

A Fall in Interest Rates

• Increase demand
• More expenditure
• The value of the pound will fall against other major currencies
• Basically the reverse to 'a rise in interest rates'

Exchange Rates - The price of one currency expressed in terms of another

(1) Free-Floating

Internation foreign exchange market. An increase in supply and demand of currency, will increase its value

(2) 'Dirty' Floating

A short term tactic, used by the Government by intervening in the market, to influence the value of a currency

(3) Fixed Exchange Rates

Exchanging single currency e.g Euro

THE EFFECTS ON A BUSINESS:-

• Difficulty forecasting overseas earnings
• Costs of imports?
• Prices charged overseas

Inflation is the rise in the level of prices and the corressponding fall in the value of money - measured using the Retail Price Index

There are 2 main causes

(1) Demand-pull (2) Cost-Push