Impact Of The Economy On Business

The economy affects businesses through the following ways:
If large numbers of people are unemployed, spending on goods/services will decrease, people who are then unemployed pay less tax and get more social welfare. Then because more social welfare (dole money) is being paid out taxes increase. As a result of taxes increasing people do not wish to buy goods.
2. Interest Rates (IR)
Interest Rate Swaps and Their Derivatives: A Practitioner's Guide (Wiley Finance)IR can be defined as the cost of borrowed money. In India IR are set by the central bank. If IR is low it is good for entrepreneurs to seek loans from financial institutions. Low IR is also important to encourage customers to borrow from banks to buy cars/houses/equipment.
3. Exchange Rates
A drop in the E.R means that other currencies are more expensive. An attractive E.R helps to attract tourists to the country.
High ER            goods being exported become more expensive abroad
                         Imported raw materials become cheaper
Low ER             goods exported become abroad cheaper and therefore easier to sell 
                          Imported raw materials will become dearer.
Note: There is no ER between nations in the Euro zone.
4. Inflation
Is defined as the annual percentage rise in prices from 1 year to the next. Inflation is measured by the CSO. High levels of inflation leads to:
§       Product being more difficult to sell abroad/at home
§       Reduction in profits of  firms
§       Decline in sales of firms
§       Less money available for consumers to buy goods
§       Industrial relations problems, employees will look for pay increases
Note: In India at the moment Inflation levels are high.. WHY?
5. Taxation
Happiness and Economics: How the Economy and Institutions Affect Human Well-Being.Businesses and employees have to pay VAT/PRSI/PAYE/corporation tax, so it is quite clear that the economy impacts on businesses.
High personal employees tax leaves less disposable income for employees to spend
High rates of personal tax leads to employees seeking higher wages
Lower rates of tax – stimulate employees to join company
6. Grants – are given by the government to enable businesses to grow
Economic Growth – if the economy is growing it becomes more wealthy
                                        More money for businesses to expand


Business impacts upon the economy in 3 ways
1-   Employment Levels
Shops/pubs/restaurants/supermarkets etc create employment so the following consequences occur as result.
§       Less unemployment benefit being paid out by govt
§       Creation of higher std of living as people have sources of income
§       Profit made in business are usually invested back into the business – more jobs
§       Increases in levels of employment will lead to more jobs for builders/plumbers/carpenters etc.
2. Tax Revenue (TR)
There is an increase in TR for the government through
Unlocking the Secrets of the Fed: How Monetary Policy Affects the Economy and Your Wealth-Creation PotentialVAT – because extra goods/services bought
PAYE –- because of larger work force
Government/economy gain on corporation taxes.
3. Environment
Businesses affect the environment through pollution such as industrial pollution/air pollution/water pollution.
Social costs such as road traffic delays/health risks to workers/noise pollution
Development of Businesses also affects parking problems/litter problems and a distinct lack of green spaces in urban districts.