Economic external influences
The business cycle
- External influences are forces outside the firm that it must watch and adapt to.
- The business cycle rises and falls in four stages:
- boom — fast growth, high demand, rising costs,
- recession — falling demand and output,
- slump — a deep, long recession,
- recovery — demand rises again.
Practice
During a recession, a business typically sees:
A recession means falling demand and output; a boom is fast growth.
Interest and exchange rates
- Interest rate = the price of borrowing. When it rises, spending and investment fall (loans cost more).
- Exchange rate = the price of one currency in another:
- appreciation (stronger) → exports dearer, imports cheaper,
- depreciation (weaker) → exports cheaper, imports dearer.
- An exporter often gains from a weaker currency.
Practice
When interest rates rise, customer spending usually:
Higher interest rates make loans dearer, so people and firms spend and invest less.
Practice
A weaker local currency (depreciation) makes the country's exports:
Depreciation makes exports cheaper abroad (helping exporters) and imports dearer.
Inflation
- Inflation is a general rise in prices.
- High inflation raises costs, makes planning harder, and cuts what customers can afford.
- Low, steady inflation is best for business.
You've got it
Key idea
- business cycle: boom → recession → slump → recovery
- higher interest rates cut spending/investment; a weaker currency helps exporters
- low, steady inflation is best; high inflation raises costs and hurts planning