Business and The

Economy
What is an Economy?

An Economy can be defined as the legal, political and social framework

within which business is conducted.
There are three main types of economies:
1. Open Economy: This is an economy in which people and businesses can
buy, sell, import and export from one another. E.g. Ireland, The UK,
America, etc.
2. Mixed Economy: This type of economy occurs when both the government
and private enterprises own factors or production to produce goods and
provide important services for the economy. E.g. Ireland
3. Controlled Economy: This economy happens when the government owns
all the factors of production. E.g. China
Characteristics of a good Economy

1. High profits
2. Low levels of Unemployment
3. Inflation and Interest levels are low
4. The budget for the government is a surplus
5. Growing businesses
6. The balance of payments is in surplus
Economic Variables

The following economic variables have an effect on the economy:

1. Interest Rates
2. Inflation
3. Exchange Rates
4. Subsidies and Grants
5. Employment & Unemployment
6. Taxation
Interest Rates

Interest rates are the amount charged by a bank or financial institution for
giving a loan.
It is also the amount of money paid to a customer of a bank or financial
institution for saving their money.
Interest rates are decided by the European Central Bank (ECB).
Interest impacts on businesses as:
1. High Rates deter business expansion and can reduce business profits.
2. High Rates can cause inflation, meaning less disposable income for customers.
3. High Rates also attract savings, which means potential customer pay prefer to
save than spend.
Inflation

Inflation is the sustained increase in the level of selling prices over a

specific period.
Inflation is measured by the Consumer Price Index (CPI).
High inflation can impact both business and the economy, such as:
1. Increased selling prices
2. More imports, which will negatively effect the balance of trade and the
balance of payments.
3. Reduction in Job creation and employment.
Exchange Rates

Exchange rates are the price of a certain currency when expressed in

another currency.
Countries have different currencies of different values. E.g. The Euro vs The
Pound.
Ireland is currently part of the single currency, as they are apart of the EU,
with most member states using the euro.
Trading in the single market eliminates problems with exchange rates.
Non- Euro states, such as The UK and US, have their own currency.
There are fixed exchange rates and floating exchange rates.
Exchange Rates

Impact of changes in exchange rates:

1. A fall in the value of the euro will result in exports becoming cheaper and
importing becoming dearer.
2. A rise in the value of the euro means that exports become dearer and
imports become cheaper. This makes it hard for Irish enterprises to
compete against foreign competition.
Subsidies and Grants

A subsidy is a payment of money by the government to a firm as a form of

price support. An example of this would be CI so they are able to run
travel services.
A grant is a non repayable amount of money received by a business from
either the government or the EU to increase its competitiveness. Many
firms have been attracted to locate in Ireland due to the numerous grants
available from Enterprise Ireland.
Employment and Unemployment

Employed personnel make PAYE payments which results in Government

revenue.
Unemployment means that the state must pay social protection which means
less revenue for the government.
The effects of unemployment on Irelands economy include:
1. Increased government expenditure
2. Reduced government income
3. Increased emigration
4. High level of social problems
5. Reduced profits and sales
Taxation

Tax is a compulsory payment to the exchequer. This is a source of finance for

the government.
There are several different payment in tax such as PAYE, PRSI, USC, VAT,
corporation tax and capital gains tax.
Tax mainly affects Business, Consumers and Wage Earners.
The effects of taxation involve:
1. Profit Reduction
2. Decline in sales
3. Less disposable income
4. Reduced motivation