External Influences
Business: Edexcel GCSE, topic 1.5.6
Interest Rates
Interest rates are effectively the price of money. Interest is charged on any money that people borrow and this is paid to lenders.
Interest payments
- When consumers or businesses borrow money, they usually pay back more than they borrowed. This extra amount is called the interest payment.
- The interest rate is the percentage of the loan that is charged as the price for borrowing.
Saving vs borrowing
- When people save money, they get paid interest by the bank.
- Therefore, the higher the interest rate, the more expensive it is to borrow money and the better it is to save money.
Impact on loans
- When interest rates are low, more companies will borrow money because it is cheaper to do so.
- This is likely to lead to more investment and higher growth for businesses.
- When interest rates are high, the opposite is true.
Impact on consumer spending
- When interest rates are low, consumers are less likely to want to save because they get less money in return for saving.
- This means that the demand for goods and services goes up as people spend more of the money they earn on goods and services.
- When interest rates are high, people have more of an incentive to save money. But the interest rates on their mortgage payments also rise.
Businesses Face Constantly Changing Environments
Every business is affected by the external environment that it operates in. The business environment is characterised by:
Technological advancements
- Advances in technology can affect every aspect of a business. If there is a technological advancement in the capital used by a company, they may be able to produce the same products and services at a lower cost per unit.
- In the industrial revolution (1780 - 1850), advances in technology reduced the cost of cotton cloth (used in your clothes) by 85%.
The economy
- The economic situation describes how well the country and world’s overall economy is performing.
- For example, in 2008 there was a financial crash which led an increase in unemployment in the UK and other countries. Because of this, the customers of most businesses began to spend less money. Customers had less money to spend on luxury products like Gucci handbags or expensive holidays.
Legislation
- Some industries are heavily impacted by laws (also known as pieces of legislation).
- When legislation (the law) changes, businesses can be forced to change their practices.
- For example, the UK government changed a law and forced cigarette companies to sell their products in plain packaging.
Environmental expectations
- In today’s business environment, businesses have to change the way they operate to meet environmental expectations.
- For example, in 2018, the supermarket Iceland promised not to use plastic packaging in their supermarkets by 2023.
- Automotive (car and lorry) companies may be pressured to make electric vehicles instead of those that use petrol (or diesel) fuel.
Test yourself on External Influences
Which of the following is true when interest rates are low?
What is an interest rate?
How much money do businesses normally pay back when they loan money with a 1% interest rate?
What is the business environment characterised by?
The supermarket Iceland promised not to use plastic packaging in their supermarkets by 2023. What has this business been influenced by?