External Influences on Business Activity

• Nothing in this chapter is automatically good or automatically bad. Every external change creates winners and losers within the same economy. The mark is for saying which side this firm is on, and why.
• N P L D C — Necessity, Positioning, Labour, Destination, Capacity. Five checks, thirty seconds, and a generic answer becomes an applied one.
• Two of the four exposures are on the cost side and two are on the demand side. Name one of each and you have shown that the lever acts in both directions at once — which a one-sided answer cannot show.
• Private or external is never about how big it is, how bad it is, or whether anyone objects. It is only ever about who.
• Every threat in the right-hand column is the left-hand column read from somebody else's country. That symmetry is the whole idea of interdependence.
• Say the sentence out loud with the currency named: “Our currency has fallen, so foreign money buys more of our goods — our exports look cheaper to them, and their goods look dearer to us.” Direction errors nearly always come from not naming whose currency moved.
• If you have five minutes and nothing else: name the firm, name the change, write four links, name the condition. That habit is worth more than any list in this chapter.

• Identify the stage of the business cycle a described economy is in, and outline what happens to demand, employment and investment in that stage.
• Define Gross Domestic Product and inflation precisely, and explain why neither affects every business equally.
• Explain why a recession damages a discretionary business more than a necessity business, and why a firm near full capacity responds to a boom differently from one with spare capacity.
• State the four government economic objectives and explain the tension between them.
• Explain how a change in taxation, government spending or interest rates reaches a specific business's costs, prices, demand, cash flow and profit.
• Calculate the change in an annual interest cost, and interpret what it means for the business.
• Justify a business response to an economic change, naming the strongest limitation on your recommendation.
• Explain the difference between a private cost and an external cost, and between a private benefit and an external benefit, using your own examples.
• Define sustainable development and explain how a business decision can contribute to it.
• Consider the influence of consumers, employees, investors, media, pressure groups and governments on environmental decisions, and why an unverified environmental claim is a commercial risk.
• Explain an ethical conflict without assuming that ethical behaviour raises or lowers profit.
• Define globalisation and explain its causes, without confusing it with international trade or with multinational ownership.
• Explain the difference between an import tariff and an import quota, and justify a view on protectionism from more than one stakeholder's viewpoint.
• Consider a multinational's effect on a host country against conditions rather than against the label.
• Explain the effect of appreciation and depreciation on an importer and on an exporter, always from a named home currency.
• Justify one case-study judgement that brings several external influences together, with a recommendation and a condition.

This is a fictional learning case. Northgate Interiors, its figures, its suppliers and its market are invented for teaching. No real business, country, law or tax rate is described.

Inflation

A sustained rise in the general price level in an economy, which reduces the real purchasing power of a given amount of money. Inflation describes the average movement of prices, not a uniform rise: individual prices rise at different rates and some fall. For a business it can raise input and wage costs, create uncertainty in pricing and contracting, and weaken customers' real spending power, with the net effect depending on whether the business can pass higher costs on in its own prices.

Gross Domestic Product (GDP)

The total value of goods and services produced in an economy during a given period, usually a year. A rise in GDP indicates that the economy has produced more output than in the comparison period, which often accompanies higher incomes, employment and demand, but the benefit is unevenly distributed: whether any individual business gains depends on its product, its market, its pricing position and whether it has spare capacity to serve additional demand.

External Cost

A cost of a business decision that is borne by third parties rather than by the business making the decision. Because it does not appear in the firm's own accounts, it does not influence the decision unless regulation, taxation or reputational pressure brings it in. Examples include residents living with air pollution from a factory, congestion caused by traffic drawn to a new development, and communities absorbing the health effects of emissions. A cost the business itself pays, including a fine or clean-up bill, is a private cost, not an external cost.

Government Spending

Expenditure by government on goods, services, infrastructure, public sector employment and transfer payments. It reaches businesses through two distinct routes: directly, as demand, when government buys goods and services or awards contracts; and indirectly, when public sector pay and transfer payments raise households' incomes and therefore consumer demand. Higher government spending does not reach every business, because the benefit is concentrated in the sectors and regions where the spending occurs.

Globalisation

The increasing integration and interdependence of markets, production and economies across countries, so that events and decisions in one economy transmit more rapidly and more strongly to others. It has been driven by cheaper and faster transport, improved communication, digital trade, reduced trade barriers, multinational investment and global supply chains. Globalisation is not the same as international trade, which is far older, nor the same as multinational ownership: a business can be deeply exposed to globalisation through its competitors and suppliers while operating in only one country.

Government Economic Objectives

The economy-wide targets a government pursues through its economic policy: growth in Gross Domestic Product, low and stable inflation, high employment, and economic stability. The objectives are partly in tension with one another, so a government pursuing one may make another harder to achieve, and businesses are affected by the policy tools used to pursue them as much as by the objectives themselves.

Business Cycle

The pattern of rises and falls in the total level of economic activity in an economy over time, conventionally described in five stages: growth, boom, recession, slump or trough, and recovery. The stages describe the direction and level of activity, not a fixed or predictable timetable, and the same stage affects different businesses differently depending on what they sell, who buys it, and how much spare capacity they hold.

Sustainable Development

Development that meets the needs of the present without reducing the ability of future generations to meet their own needs. For a business it means operating so that the resources, environment, workforce skills and community relationships it depends on are not consumed faster than they can be renewed. Contributions include resource efficiency, waste reduction, renewable energy, durable product design, responsible sourcing and pollution control. It is broader than recycling, which addresses only one stage of one flow of materials.

External Benefit

A benefit arising from a business decision that is received by third parties rather than by the business itself, and for which the business receives no payment. Examples include skills gained through employee training that later benefit other employers, an access road built for a site that the wider community also uses, and improved local amenities funded by a development. Because the business cannot charge for an external benefit, it has no commercial incentive to produce more of it than its own interest requires.

Interest Rate

The cost of borrowing money, and the reward for saving it, expressed as a percentage of the sum borrowed or saved over a period. A rise in interest rates increases the cost of servicing loans and overdrafts for businesses and reduces the amount households can afford to borrow, which weakens demand for products commonly bought on credit. The size of the effect on any business depends on how much it has borrowed, whether that borrowing is at a variable rate, and whether its customers buy on credit.

Business Ethics

The moral principles that guide a business's decisions, covering what it considers right and wrong to do rather than only what is legal or profitable. Ethical issues in business include working conditions, child labour, discrimination, the prices paid to suppliers, truthful marketing, customer privacy and animal welfare. Ethical behaviour may raise short-term costs while strengthening reputation, customer loyalty, employee retention, supplier reliability and investor confidence, so it is neither automatically profitable nor automatically unprofitable.

Pressure Group

An organisation formed to influence the decisions of businesses or governments on a particular issue, such as environmental protection, labour conditions or animal welfare. It works through campaigning, research, publicity, lobbying and organised consumer action. A pressure group has no legal authority: it cannot set rules, impose fines or close a site, so its influence operates indirectly by persuading consumers, employees, investors, the media and the government, who do hold such powers.

Exchange Rate

The price of one currency expressed in terms of another, determining how much of a foreign currency a unit of the home currency will buy. It matters to business because it converts every internationally traded price: it sets how much a firm pays in its own currency for imported inputs, and how expensive its exports appear to a foreign customer paying in their own currency. In syllabus 7115 exchange-rate calculations are not assessed; only the direction and business consequences of a change are examinable.

Repatriation of Profit

The transfer of profit earned by a multinational's operation in a host country back to the country where the parent company is based. It matters to a host country because profit that leaves does not fund local reinvestment, local wages or local taxation, so the economic benefit of hosting the operation is smaller than its output figures suggest. How much is repatriated rather than reinvested locally is one of the main conditions determining whether a multinational's presence benefits a host economy.

Import Quota

A physical limit set by a government on the quantity of a particular good that may be imported into a country during a period. Unlike a tariff, which works through price and allows any quantity to enter provided the tax is paid, a quota fixes the maximum quantity, so beyond the limit no further imports may enter at any price. Quotas can create shortages and price rises in the domestic market, and businesses depending on imported inputs may be unable to obtain them regardless of what they are willing to pay.

Import Tariff

A tax placed by a government on goods imported into a country. It raises the price at which imported goods can profitably be sold, making them less competitive against domestic products, and it generates revenue for the government. Imports can still enter in any quantity, provided the tax is paid. A tariff raises input costs for domestic businesses that rely on imported materials or components, and can provoke retaliatory tariffs from other governments against that country's exporters.

Depreciation

A fall in the value of a currency relative to another currency, so that one unit of it buys less foreign currency than before. For a business whose home currency depreciates, imported inputs become more expensive measured in home currency, while its exports become cheaper for foreign customers paying in their own currency, potentially improving export competitiveness and demand. Depreciation is therefore favourable to exporters and unfavourable to importers, and an exporter that relies on imported components can experience both effects at once.

Multinational Company (MNC)

A business that owns or controls production, service or distribution operations in more than one country, rather than merely exporting to them. Businesses become multinational to reach new markets, to lower production or transport costs, to access labour, skills or raw materials, to operate inside trade barriers rather than pay them, to spread risk across economies, and to gain economies of scale. Whether a multinational benefits a host country depends on job quality, local sourcing, tax arrangements, regulation, reinvestment, technology transfer and external costs, not on multinational status itself.

Taxation

Compulsory payments to government levied on incomes, profits, spending or wealth. Taxes on personal income reduce households' disposable income and therefore the demand facing businesses that sell to them; taxes on business profits or on goods and services raise business costs or selling prices directly. The effect on any one business depends on which tax changed, who ultimately bears it, and how price-sensitive that business's customers are.

Appreciation

A rise in the value of a currency relative to another currency, so that one unit of it buys more foreign currency than before. For a business whose home currency appreciates, imported inputs become cheaper measured in home currency, while its exports become more expensive for foreign customers paying in their own currency, weakening export competitiveness. Appreciation is therefore favourable to importers and unfavourable to exporters, and is neither automatically good nor automatically bad for an economy as a whole.

• “The economy grew, so demand rose.” Fix Rising GDP raises aggregate activity. Whether it reaches a particular firm depends on what that firm sells, to whom, and whether it has capacity to serve extra demand. Name the firm's product before you claim a demand effect.
• “Inflation means all prices go up by that amount.” Fix Inflation is a sustained rise in the general price level. Individual prices rise by different amounts, and some fall. A firm whose input prices rise faster than its selling price is squeezed even in a low-inflation economy.
• “An external cost is a cost the business has to pay.” Fix The opposite. A cost the business pays is a private cost. An external cost falls on a third party who was not part of the decision. A pollution fine is a private cost; the residents' loss of clean air is the external cost.
• “Sustainable development means recycling.” Fix Recycling is one contribution. Sustainable development is meeting present needs while protecting the ability of future generations to meet theirs — which also covers energy sources, product durability, sourcing and emissions.
• “Globalisation means selling abroad.” Fix Exporting is international trade, which is far older than globalisation. Globalisation is the increasing integration and interdependence of markets, production and economies. It is also not the same thing as being a multinational: a firm can be deeply exposed to globalisation without owning a single overseas site.
• “A tariff and a quota are basically the same.” Fix A tariff is a tax on imports — imports can still arrive, but each one costs more. A quota is a quantity limit — beyond the limit, imports cannot arrive at any price. The mechanisms differ, so the effects on an import-using business differ.
• “A weaker currency is good for the country's businesses.” Fix Depreciation helps exporters compete and hurts importers, in the same economy, at the same time. Many exporters are also importers of components, so the two effects can meet inside one firm. Always name the currency and the firm's position before you claim a direction.

• Command-word reminder. Syllabus 7115 uses eight command words only: calculate, consider, define, explain, identify, justify, outline, state. “Explain” wants a chain. “Justify” and “consider” want a decision with the strongest limitation named. Neither is satisfied by a list.
• Paper 1 discipline. If the stimulus gives you a figure, use that figure in your answer. An answer that could have been written without reading the data has already lost the application marks.
• The pricing-power question. Whether inflation squeezes a firm's margin depends on whether it can raise its own prices without losing customers. A specialist engineering firm with few substitutes usually can. A supermarket own-brand supplier facing a powerful buyer usually cannot. Say which, and why, before you claim profit falls.
• What this gives you in an answer. When a case says the government has raised interest rates, you can say why: it is almost always pursuing the low-and-stable-inflation objective, accepting a cost to growth. That single sentence turns a description into an explanation.
• The move that turns a response into an argument. Match the response to the cause. If demand fell because customers cannot get credit, cutting price does not help — the obstacle is not the price. If margin fell because of a tax on inputs, chasing new segments does not help — the new customers cost the same to serve. Say why the obvious response is the wrong one, and you have written evaluation.
• On legal controls. The syllabus expects you to know that governments impose legal controls on environmental activity — pollution limits, planning restrictions, waste rules — and that these can force equipment, process change or relocation while also creating common standards and an incentive to innovate. Do not name a specific country's law, penalty amount or procedure unless the case supplies it. Write about the mechanism, not about a statute you cannot verify.
• A sentence worth memorising as a structure, not as content: “This decision transfers a gain from [group] to [group]. In the short run it costs the business [X]; over a longer period it may return [Y]. Which dominates depends on [named case condition].” Fill it from the case and you have written analysis and evaluation in three lines.
• The calculation above is ordinary arithmetic on a price and a percentage. Do not confuse it with an exchange-rate calculation, which is not assessed in syllabus 7115. Tariff arithmetic stays in one currency; exchange-rate arithmetic converts between two, and you will never be asked to do that. The syllabus does not say that tariff costs will be set as a calculation — the working is here because it makes the size of the effect concrete, which is what the analysis needs.
• The sentence that completes the evaluation. “The firm is both an exporter and an importer, so the depreciation helps its sales and hurts its costs at the same time; which dominates depends on whether imported content is a larger share of its cost base than exports are of its revenue.” It is the hardest step in the topic, and it requires no calculation whatsoever.
• Self-audit. Take one of your recent practice answers. Underline every sentence that would be equally true of a completely different business. If more than a third of the answer is underlined, the problem is not knowledge — it is application, and this clinic is the fix.
• The highest-yield ten minutes in this chapter. Draw the currency matrix from memory, then the private-versus-external boundary, then the tariff-versus-quota distinction. Those three are the mechanisms the rest of Section 6 keeps reusing, and all three go wrong for the same reason — recalling a phrase rather than a mechanism.

• Both papers carry equal weight. Section 6 material can appear in either, but it behaves differently in each.
• Usually as definition and short-chain work attached to a small data set: a GDP growth figure, an inflation rate, an interest-rate change, a table of export and import values. Define the term precisely, read the data as given, and build one clean chain for each point the question asks for. Do not import a memorised essay.
• Paper 1 discipline. If the stimulus gives you a figure, use that figure in your answer. An answer that could have been written without reading the data has already lost the application marks.
• Section 6 is unusually well suited to the case study, because external influences hit every other part of the business at once. A case describing a currency movement is never only about currency — it is about pricing, capacity, cash flow, supplier relationships and objectives. Where a question uses justify or consider, it is asking for a recommendation, not a survey.
• Build the point → Link it to case evidence → Analyse the chain of consequence → Decide, with a clear recommendation → Evaluate by naming the strongest limitation and the condition that would change your judgement.
• The evaluation trap. Ending on “it depends” adds nothing. It depends is the question, not the answer. Say what you would do, say which case evidence decides it, name the strongest argument against, and state the specific condition — a number, a timescale, a market fact — that would flip your recommendation.