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A Level Business Pearson > 2.10 External influences > Flashcards

2.10 External influences Flashcards

1
Q

define appreciation of a currency

A

a rise in the value of a currency

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2
Q

define base rate

A

the rate of interest around which a bank structures other interest rates

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3
Q

define boom

A

the peak of the economic cycle where GDP is growing at its fastest

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4
Q

define consumer price index

A

a common measure of price changes used in the EU

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5
Q

define deflation

A

a fall in the general price level,
also when a economic growth is falling

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6
Q

define depreciation

A

a fall in the value of a currency

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7
Q

define downturn

A

a period in the economic cycle where GDP grows but more slowly

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8
Q

define economic/trade/business cycle

A

regular fluctuations in the level of output in the economy

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9
Q

define exchange rate

A

the price of one currency in terms of another

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10
Q

define fiscal policy

A

using changes in taxation and government expenditure to manage the economy

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11
Q

define government expenditure

A

the amount spent by the government in its provision of public services

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12
Q

define gross domestic product

A

a common measure of national income, output or employment

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13
Q

define index linked

A

the linking of certain payments to the rate of inflation

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14
Q

define monetary policy

A

using changes in the interest rate and money supply to manage the economy

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15
Q

define recession

A

a less severe form of depression,

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16
Q

define recover/upswing

A

a period where economic growth begins to increase again after a recession

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17
Q

define depression

A

the bottom of the economic cycle where GDP starts to fall with significant increases in unemployment

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18
Q

define taxation

A

the changes made by the government on the activities, earnings and income of the businesses and invidivuals

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19
Q

what do interest rates determine?

A

the cost of borrowing or the return on savings

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20
Q

what is an interest rate?

A

a percentage of the borrowing that is added to the total

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21
Q

how is an interest rate calculated?

A

its a percentage of the total borrowed
£100 borrowed w a 10% interest rate, £110 to pay back
fall = decrease in costs
rise = increase

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22
Q

what is the interest rate on savings and how is it calculated?

A

the amount of money paid into a savings account by the bank, based on how much the customer keeps in the bank account
fall=decrease in savings
rise = increase in savings

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23
Q

which bank sets the base rate?

A

the bank of england
it influences other banks rates

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24
Q

how can interest rates affect consumer spending?

A

high interest rates =most consumers have less money to spend, ppl w borrowing have to pay more money back in interest -> less disposable income-> demand decreases
low int rates = more money to spend -> less to pay back in interest ->more disposable income -> more demand

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25
Q

how can the effect of interest rates depend on the product?

A

products which require borrowing like cars & houses, are more sensitive to changes
when interest rates increase, firms can change strategy to diversify away from these products and into cheaper ones

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26
Q

why does inflation occur?

A

there is an overall increase in the price of goods and services within an economy

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27
Q

what are the two types of inflation?

A

demand-pull
cost-push

28
Q

what is demand pull inflation?

A

there is too much demand
happens when theres an increase in disposable income so demand inc and businesses can’t supply goods quick enough so inc their prices
inc profit margins

29
Q

what is cost push inflation?

A

when rising costs increase their prices
employee wage rises can make prices increase
decrease profit margins if businesses dont increase prices

30
Q

what is the rate of inflation?

A

the percentage change in the price of goods and services within an economy, in one year compared to the previous year

31
Q

how can expectations of inflation make it worse?

A

bus will inc prices as they expect suppliers to do so -> ppl demand higher wages -> inc prices due to inc labour costs
inc in demand
=the wage price spiral

32
Q

what happens when inflation is high?

A

spending increases as ppl rush to buy before prices further increase
if wages don’t increase in line -> spending decreases as ppl can afford less
exports are expensive -> UK is less competitive globally

33
Q

what happens when inflation is low?

A

UK businesses have a competitive advantage globally
people can afford more -> more demand

34
Q

what is deflation?

A

an overall decrease in the price of goods and services within an economy

35
Q

what does deflation cause?

A

a fall in productivity as there is not enough demand -> fall in price
rise in unemployment -> demand drops further and decreases prices

36
Q

what does the consumer price index measure?

A

the inflation in a country
using index numbers to track the changes in the average cost of a ‘basket’ of goods and services that an average household would regularly buy

37
Q

how are index numbers calculated?

A

index number = average value of basket/base value of basket x 100

38
Q

how do we find the average value of the basket?

A

index number/100 x base value of the basket

39
Q

how can inflation effect business strategy?

A

prenium goods are most affected -> cheaper alternatives -> react by reducing prices or investing in advertising
high inflation= good time to expand, cheaper to borrow if interest rates are lower than inflation to invest in land
when UK interest is high-> firms tend to expand inyo countries w low and stable interest rates

40
Q

how can moving exchange rates effect the price of products?

A

inc = Uk exports are more expensive, bad as products are less competitively priced abroad -> need to decrease prices -> alter marketing strategy?
=good for UK importers as imports become cheaper -> higher profitability -> profit can be reinvested into elsewhere in the business

41
Q

how will a decrease in exchange rate affect UK exports and imports?

A

exports = cheaper for other countries -> more competitively priced abroad -> keep their price the same -> inc demand or increase price -> inc profitability
imports = bad, become more expensive -> change suppliers to uk suppliers -> inc price to cover extra costs

42
Q

how do we convert currencies?

A

given how much one currency is equal to a unit of the other
multiply the unit by the exchange rate
e.g. convert £47 into euros, £1 = 1.41 Euros
£47 X 1.41 = $66.27
if converting other way, divide the 66.27 by 1.41 = £47

43
Q

how can we compare exchange rates by using a currency index?

A

each currency has a different rate but both change in relation to a starting value of 100
can plot currency index numbers and plot them on a graph

44
Q

what is the currency index number formula?

A

exchange rate/ base exchange rate x 100

45
Q

what is the formula for exchange rate/

A

exchange rate = currency index number/100 x base exchange rate

46
Q

how can government spending influence the economy?

A

on social services, health and education -> money into economy
changes affect firms within the economy controlled by that gov: changing expenditure on social welfare -> quick impact as those who receive benefits instantly have more money available to spend -> demand go up
infrastructure ->slow effect -> improve supply routes and customer access -> inc demand

47
Q

explain income tax?

A

taxes put on an individuals tax
high rates reduce consumers disposable income -> spend less-> reduced turnover
low rates encourage spending -> bigger profits

48
Q

explain business tax’?

A

taxed on profits
ST & partnerships pay income tax
LTD AND plc PAY corporation tax - direct tax
high tax rates for business -> profits after tax are reduced
also pay a business rate tax based on value of their premises, same over UK -> reduces competitiveness as property in the south is more expensive than in the north

49
Q

what are some indirect taxes?

A

taxes on spending
VAT
taxes on pollution,tobacco and alcohol

50
Q

what do high tax rates do?

A

discourage individuals from spending and businesses from expanding
increasing income tax reduces spending power, cuts demand and lowers economic activity

51
Q

what can reducing taxes do?

A

encourages businesses to expand

52
Q

what does the effect of a change in taxes depend on?

A

the income elasticity of the goods or service
rises in income tax reduces demand for luxury goods

53
Q

what are the four stages of a business cycle?

A

boom
recession
slump
recovery

54
Q

what happens in the boom stage?

A

production reaches max
shortages in supply
price increases
low unemployment rate
shortages of skilled labour -> wages rise

55
Q

what happens in the recession stage?

A

incomes decrease
demand decreases
unemployment rises
business confidence reduces
wages don’t rise in line w inflation

56
Q

what happens in the slump stage?

A

GDP is at a low
businesses close factories and lots of redundancies
high rates of unemployment
businesses can become insolvent

57
Q

what happens in the recovery stage?

A

production increases
unemployment rates decrease as employment rises
rise in wages
rise in disposable income and demand

58
Q

how does the income elasticity affect a businesses products?

A

income elastic goods = demand increases in recovery and dec in a recession
income inelastic goofs aren’t affected as much

59
Q

what decisions would a business make during a boom?

A

to raise prices -> inc in profitability -> slows demand,
long lasting booms-> invest in production facilities to inc capacity
-> produce new products to take advantage of inc consumer income

60
Q

what decisions would a business make during a recession?

A

make workers redundant to save wage costs
increase capacity utilisation
market goods elsewhere like to other countries
if long lasting national recession, may choose to relocate abroad

61
Q

what is a microeconomy?

A

part of the economy that consists only of the individual consumers and firms that make up a specific market

62
Q

what is an example of microeconomic uncertainty?

A

new competitor entering the market that a business is in can lead to uncertainty over the number of customers they will have in the future

63
Q

what is the macroeconomy?

A

the economy as a whole, including businesses and customers

64
Q

what is an example of a macroeconomic uncertainty?

A

change in government leads to uncertainty over the availability fo government spending in the future

65
Q

How can a business predict the effects of uncertainty?

A

economic forecasting
scenario planning
to create plans to deal with it

A Level Business Pearson (40 decks)

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