Economic Factors in Business Definition
Economic influence on business activity
The economic climate has a big impact on businesses. The level of consumer spending affects prices, investment decisions and the number of workers that businesses employ.
The economic factors that affect business activity
The economy includes all activities in a country concerned with the manufacturing, distribution and the use of goods and services. The economic climate has a big impact on businesses. The level of consumer spending affects prices, investment decisions and the number of workers that businesses employ.
The economic climate affects businesses in four main ways:
- unemployment
- changing levels of consumer income
- interest rates
- tax rates
Unemployment
Unemployment refers to people who are actively seeking employment but are unable to find work. If somebody does not have a job, this does not necessarily mean they are unemployed. Some people choose not to work, either because they are financially stable or because they have family to look after. Others may not be able to work because they are ill.
Unemployment means that an economy is not making full use of the workers that are available. The economy will not grow as quickly as it could, and it may start to slow down. This downturn in economic activity will directly affect businesses.
The national level of unemployment is given as a percentage, the government aim for this percentage to be as low as possible. There are a number of reasons people become unemployed, such as being made redundant , being dismissed from a role, or leaving education.
Changing levels of consumer income
Income is money that is received either from work or from investment . The amount of income someone earns will influence how much they spend.
If consumer incomes increase, general spending is also likely to increase. An increase in spending will help businesses expand, lower unemployment and improve the economy. However, if consumer incomes fall, spending is likely to decrease. This means that businesses will not perform as well, unemployment will rise and the economy will be less stable.
Changes in interest rates
The interest rate represents the cost of borrowing money or the amount a saver receives in interest.
Usually stated as a percentage, the rate reflects how much is earned or paid in interest. For example, an interest rate of 4% a year would require £4 to be paid each year for every £100 borrowed. Alternatively, a saver would receive £4 a year for every £100 they invested.
Changes in interest rates affect both savers and borrowers.
| Savers | Borrowers | |
|---|---|---|
| Increase in interest rates | Will receive more interest on their savings. This will encourage them to spend less so that they can save more. | Will have to pay more back for money that is borrowed. This will discourage them from borrowing. |
| Decrease in interest rates | Will receive less interest on their savings. This will discourage them from saving, so they may spend their money instead. | Will have to pay less back for money that is borrowed. This will encourage them to borrow more money to spend. |
Taxes
A tax is a financial charge made by a government on individuals, consumers and businesses. The UK has a range of different types of taxes. These include:
- income tax
- corporation tax
- National Insurance Contributions (NICs)
- value-added tax (VAT)
Economic Factors in Business Definition
Source: https://www.bbc.co.uk/bitesize/guides/zjjnnrd/revision/1
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