External environment theory

External environment illustration


During a boom, the economy is growing and output is high. Consumer spending is also at a high, with many willing to borrow money in order to fund their purchases. High mortgage lending by banks and building societies helps the growing figure of house prices. Unemployment is likely to be at a low, so much so businesses may find it difficult to recruit new employees. There will be a strong demand for goods and services and, combined with an increase in wages (as businesses compete to employ a limited supply of workers) inflation may increase. Businesses may not be able to cope with the increased demand, instead demand is likely to shift towards imported goods. Encouraged by the strong demand, businesses tend to increase their investment spending in order to maximise their capacity. The number of new businesses created will be at record numbers, having been attracted by the possibility of high profits.