in Economics

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Gross Domestic Product (GDP)

GDP is a measure of the economy in monetary value. It is a snapshot or capture of the economy at a given time. It is used to estimate the size of an economy and its growth rate. The figure is used to make comparisons between countries.

A low GDP means that businesses are likely to be laying off staff and customers are less likely to spend money with the business. Business revenues will decrease:

  • Growth in GDP: A growing GDP signifies a strong economy with increased consumer spending. Businesses often experience higher demand for goods and services. Increased demand can lead to higher sales, expanded production, and potentially greater profitability for businesses.
  • Decline in GDP: A shrinking GDP reflects economic contraction and reduced consumer spending. Businesses may face decreased demand and revenue challenges. Reduced demand can result in lower sales, production cutbacks, and potential financial strain for businesses.

Interest Rates

Interest rates are a percent paid on money borrowed or money saved. If you save money you gain interest, if you borrow money you pay interest.

High-interest rates mean customers are less likely to spend and are more likely to save, having a negative impact on business revenues as customers will be spending less. High-interest rates also mean mortgage costs increase leaving customers with less disposable income to spend.

Low-interest rates mean that customers are more likely to spend money as it is cheaper to borrow it and they have less incentive to save.

Did you know that the government reduced interest rates to try and stimulate spending in response to the recession caused by COVID-19?
  • Rise in Interest Rates: Higher interest rates increase the Cost of borrowing for businesses, leading to reduced investments in new projects or expansions. Limited investments can lead to slower business growth and potential delays in hiring or capital expenditures.
  • Decrease in Interest Rates: Lower interest rates make borrowing more affordable, encouraging businesses to invest in growth initiatives and new ventures. Increased investments can stimulate economic activity, leading to higher business expansion and potential job creation.

Employment Levels

The economy is not steady, it is constantly fluctuating. Going through a cycle of expansion or growth and contraction (decline). This is known as boom and recession (bust).

The business cycle, also known as boom and recession.

👍 During an economic boom 📈, customer spending is at its highest, jobs are plentiful, trade is good and investors make good returns.

👎 During an economic recession 📉, consumer spending is down, government deficit (debt) will be high and lots of people may be unemployed or lose their jobs and investors will find it hard to make money.

Businesses need to respond to meet changing customer needs during this time. When money is tight customers are less likely to purchase luxury goods as they look to decrease spending.

PhaseLevel of Employment
GrowthWorkforce Increasing
Employment is rising, trade is increasing and so is sales revenue. At this stage, the business may be looking to increase production and as a result, hire extra staff to cope with increased demand.
BoomWorkforce at maximum
At the boom stage, employment is at its highest. Few people will be without jobs. Customers have the most disposable income that they can spend how they wish on more luxury items and the workforce will be at its largest.
DeclineWorkforce shrinking
At this stage business revenue declines. The business will look at cutting costs and employees usually makes up the biggest business cost. As a result, redundancies and delayering may begin and can also happen due to natural wastage.
RecessionWorkforce at minimum
At the recession stage, unemployment is at its highest. The workforce is at its minimum and lots of people will be without jobs. This is due to business failures and an increase in employee redundancies as a result of customers spending less money.

Availability of Skills Locally

A skills shortage means that there is not the availability of people locally who can work for a business with the skills needed for the organisation. You can check local skills shortages here. Currently, there are current skills shortages for fiances in London with 55.1% more demand than the average of the UK.

Skills shortages have the following influences on businesses:

  • Existing workers can demand higher pay as there are more jobs than workers, otherwise they can always move to competitors workplace
  • Difficult to hire new staff — can prevent the growth of the business
  • Competitors may try to poach staff — this is when they try to ‘steal’ your staff
  • Extra staff training and development may be required to retain good staff
  • Skilled Labor Shortage: A shortage of skilled workers can lead to challenges in fulfilling customer orders and executing business plans. Delays in production and service delivery can result in customer dissatisfaction and potential revenue loss.
  • Abundant Skilled Labor: An ample supply of skilled workers enables businesses to innovate and expand their offerings. Efficient production and high-quality service can contribute to customer loyalty, repeat business, and potential growth.

Minimum Wage

The Minimum/ Living Wage is set by the government and states the lowest amount a business can pay its employees per hour (provided they are aged 25+). Check the current UK living wage here.

The living wage typically increases each year.

A living wage can impact the business in two ways:

  • Good: Customer Demand Increases
  • Bad: Business Costs Increase

Customer Demand Increases

An increase in living wage can be beneficial to businesses as customers have more money to spend, leading to increased disposable income available for them to spend how they wish.

Business Costs Increase

An increase in living wage means that the business will have increased costs. The business must pay for these extra costs somehow and will typically pass these on to the customers.

Overall Impact on Stakeholders

  • Employees: Economic influences can directly impact job security, wages, and disposable income.
  • Investors: Economic conditions influence investment decisions and market sentiment, affecting shareholder returns.
  • Consumers: Economic factors influence consumer confidence, income levels, and purchasing behaviour.
  • Business Owners: Understanding economic trends helps business owners make informed decisions about expansion, hiring, and pricing. Taxation Legislation