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1.3 Explain the effect of the wider economy on organisations

There are many examples of the wider economy’s effect on organisations.  Some examples are:

 

  • Financial markets
  • Employment
  • Inflation

Financial markets

To enable businesses to invest, grow and pay staff, finance will be required from financial markets.  The are broken up into 3 main categories:

  • shares – meaning ownership of part of a company
  • bonds – longs to large corporations or governments
  • currency – foreign exchange markets enable people to exchange one currency for another

Economic performance and stock markets are generally aligned.  A well performing stock market usually indicates a growing economy.  Gross Domestic Product (GDP) will reflect this.  This means that when GDP is growing, businesses are expanding.  The Great Depression was preceded by a steep market decline.

Customers spend more when the economy is strong, and investor confidence is high.  When the economy is weak consumers spend less, particularly on luxury items.

High interest rates may mean consumers have less disposable cash, after prioritising essentials.  However, savers benefit from high interest rates although they may keep more money in their bank account instead of investing in business.

Employment

Local and national employment rates are relevant.  Unemployed people have less disposable cash to spend.  If unemployment is high, competition for jobs make it easier for businesses to hire staff while keeping wages down.

The economy tends to work in cycles – a boom will mean more people are employed and consequently have more disposable income to spend.  Fluctuations are normal.

Inflation

This is the rate at which prices are increasing.  If prices get too high customers spend less, causing a dip in sales.