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Economic External Environment

We are going to explain the economic factors that go into the PEST analysis

Nadine Taher

on 19 November 2012

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Transcript of Economic External Environment

Economic External Environment In this presentation, an explanation is given for the economic factors that are involved in the external areas that affect businesses and firms. There are many factors that affect businesses, and the PEST analysis is used to identify the effects that a business overcomes. Economic environment is one of the factors in PEST that is will be explained in this Prezi.
Enjoy! Economic factors affect the purchasing values for costumers as well as the firms cost of capital, causing a lose of income for many firms.

Examples of these factors are such as:

1. Economic Growth
2. Exchange Rates
3. Inflation Rates
4. Interest Rates
5. Taxation Economic Factors Economic growth: Increase of the value of goods & services (production) in an economy over time. Knowing this is important in a society since our living standards are dependent on goods & services. Therefore, without growth, the community may suffer from rising living standards. Economic growth is very important because it can provide a wide range of opportunities for businesses.

- Increased profits
- A rise in average living standards
- Lower unemployment
- Increased tax revenues for government (used to fund more spending on government services)
- Improved business confidence
- Increased capital investment
- Technological innovation Economic Growth The effect of change in interest rates depends on the amount that a business has borrowed & on what terms as well as the cash balances that a business holds.
Whether the business operates in markets that depend on consumer spending from the point of view of people who use credit cards or loans to buy their goods, an increase in interest rates would mean that the price of borrowing money would increase (higher taxation).
This also means that if you pay a mortgage on your house, the price of that mortgage will increase if interest rates rise. This, in turn, affects the amount of disposable income available. Disposable income is the amount of money left over from paying the mortgage.
Some markets are more sensitive to interest rate shifts than others. These businesses are often involved with dept & where the price paid is relatively significant in contrast to customer income.
Examples of these would be such as:
Housing (mortgages), motor vehicles, holidays
Major purchases of consumer goods – e.g. new kitchen equipment, audio-visual systems Interest Rates "PEST Analysis." PEST Analysis. QuicMBA, n.d. Web. 07 Nov. 2012. <http://www.quickmba.com/strategy/pest/>.
"Inflation and It's Impact on Bisiness." NGFL WALES BUSINESS STUDIES A LEVEL RESOURCES, Sept. 2008. Web. 7 Nov. 2012. http://www.ngfl-cymru.org.uk/inflation.pdf.
"Highways Agency - PEST AnalysisA Highways Agency Case Study." Economic Factors. The Highways Agency, n.d. Web. 07 Nov. 2012. <http://businesscasestudies.co.uk/highways-agency/highways-agency-pest-analysis/economic-factors.html>.
Riley, Jim. "Economy - Interest Rates and Business." Economy - Interest Rates and Business. GCSE & IGCSE Business Studies, 24 Oct. 2012. Web. 07 Nov. 2012. <http://tutor2u.net/business/gcse/external_environment_economic_interest_rates_effects.html>.
Riley, Jim. "Economy - Exchange Rates." Economy - Exchange Rates. GCSE & IGCSE Business Studies, 24 Oct. 2012. Web. 07 Nov. 2012. <http://www.tutor2u.net/business/gcse/external_environment_economic_exchange_rates.htm>.
Riley, Jim. "PEST Analysis." PEST Analysis. GCSE & IGCSE Business Studies, n.d. Web. 07 Nov. 2012. <http://www.tutor2u.net/business/strategy/PEST_analysis.htm>.
Riley, Jim. "Economic Environment - Economic Growth." Economic Environment - Economic Growth. GCSE & IGCSE Business Studies, 24 Oct. 2012. Web. 07 Nov. 2012. <http://www.tutor2u.net/business/strategy/economy-economic-growth.html>.
Riley, Jim. "Economic Environment - Business Cycle." Economic Environment - Business Cycle. GCSE & IGCSE Business Studies, 24 Oct. 2012. Web. 07 Nov. 2012. <http://www.tutor2u.net/business/strategy/economy-business-cycle.html>. Citations Done by:
Faisal Taifi, Iman Al-Fakhri, Nadine Taher, Rohan Bosman Exchange Rates Inflation Rates Economic Cycle/Taxation It is the value of a one currency expressed as another.
If a currency is strengthening (appreciating) then its value has increased compared to other currencies. However, if a currency is weakening (depreciates) then its value has decreased compared to other currencies.
Most currencies are based on flexible exchange rates & therefore currencies appreciate & depreciate constantly. The main reason currencies may depreciate or appreciate is due to the strength of the currency depending on the demand from other countries for said currency.

Exchange rates may affect a business in the following ways:
1. Can increase or decrease the price of a product sold abroad.
2. Price of imported raw materials may change.
3. Price of competitors’ products may change in the home market. Caused by either cost push or demand pull factors.
Cost-push factors: Related to the cause of increase of cost of production & the cost of production itself. Examples include increasing the cost of raw materials, labor or interest rates causes the cost of capital to increase.
Demand-pull factors: Relates to the increase of prices due to the increase of demands. (Higher demands= higher prices). These two factors effect firms by discouraging investment.
High inflation: Brings less chance of returns on capital purchased as well as an expectation that demands will fall soon. It's one of the main reasons governments limit inflation.
Low inflation: Helps a firm expand & develop over time & encourages investment. Other impacts inflation rates have on firms are increasing menu costs, searching for cheaper suppliers & raw materials, & increasing management time spent negotiating wage increases with employees. This cycle goes through many ups & downs, but usually repeats the same cycle.
The 4 stages in an economic cycle are:
1. Boom 2. Recession 3. Depression 4. Recovery
Time to recovery in this cycle is precisely measured & helps determine whether or not the economic growth is rapidly increasing.
Advantages to a rapidly growing economy: Increased profits, a rise in average living standards, the creation of new jobs, lower unemployment, increased tax revenues for government - used to fund more spending on government services, improved business confidence, increased capital investment, & greater technological innovation.
Disadvantages: Risk of demand pull inflation if actual growth exceeds potential growth, increased inequality if the benefits of growth are not evenly distributed, & increased demand for imports & a trade deficit
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