38. Impact on firms of economic factors

Economic growth and the business cycle
1. What is economic growth and why does it matter?
  1. Caused by productivity advances - technology? Means that more good/services are produced with same population.
  2. It improves standard of living.. produce more, therefore more to consume.
  3. Important to firms. Creates more opportunities when consumer taste changes. Easier to set up/expand. New gaps emerge = budding entrepreneurs
2. The business (economic) cycle
  1. Boom: grows rapidly. Recession: growth stops or 'two successive quarters of falling output'. Slump: sustained period of negative growth.
3. The impacts of the business cycle
  1. Luxury good firms benefits from booms. Lidl may struggle.
  2. Managers must predict the future state of the economy.
4. Impacts of recession
  1. Aim to survive so you can benefit when the economy recovers.
    1. The challenge for management is to have a long-term strategy that can keep the business healthy in good and bad times.
5. What actions should a firm take in an economic boom?
  1. Increase dividends? - Won't improve long-term competitiveness
  2. Invest in new products & production methods - more competitive.
  3. Cash reserve?
  4. Banks react by relaxing lending standards -> firms find it easier/ cheaper to expand.
    1. This can lead to rising inflation!
The effects of inflation on a firm's financial position
1. Advantages of inflation
  1. Makes real assets worth more -> more impressive balance sheet -> find it easier to get finance from banks/shareholders (looks secure).
  2. Erodes real value of money owned. Borrowings more easily covered by rising income and profits.
2. Drawbacks of inflation
  1. Inflation can damage profitability.
  2. Damage cash flow as it pushes up price of machinery.
  3. May damage industrial relations (business and staff)
3. Measures the percentage annual rise in the average price level. Reduces the purchasing power of money. Increases cost of living.
Unemployment
1. Created when demand for labour has fallen relative to the available supply.
2. Benefits created by unemployment
  1. Force cost-saving changes
  2. Labour turnover falls
  3. Recruitment - easier. Quality - higher.
3. Costs/problems created by unemployment
  1. Create insecurity - damage moral
  2. Affect consumer spending - affect firms revenue/profit.
  3. Affected by crime/ other social problems.
4. Can be affected by emigration and immigration
Exchange rates
1. Measures the quantity of foreign currency that can be bought with one unit of another.
2. The impacts of a high exchange rate
  1. Rise in pound = increase in price of other currency to keep the same profit. (Exporters)
    1. Exporters want currency to fall
  2. Firms that import.. prefer high exchange rates.
    1. Price of products is cheaper
      1. = More profit
3. Impacts of low exchange rate
  1. A weak pound make exports seem cheaper
  2. Cost more to import stock - raise prices? = loss of customers. - do nothing? = less profit.

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38. Impact on firms of economic factors

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