2.5 - External Influences Flashcards
What is inflation?
Inflation is the general rise in prices in an economy over time.
What is the Consumer Price Index (CPI)?
It measures the monthly changes in the prices of a range of goods and services and compares these changes to earlier periods, calculating the rate of inflation.
What are exchange rates?
The exchange rate is the value of one currency expressed in terms of another.
What is an appreciation of the pound?
An increase in the value of the pound against other currencies.
What is a depreciation of the pound?
A decrease in the value of the pound against other currencies.
How will an appreciation of the pound affect businesses which export?
- Sales are likely to fall as products become more expensive when compared to overseas competitors.
- Prices may need to be lowered in order to remain competitive.
How will an appreciation of the pound affect businesses which import?
- Costs are likely to fall as supplies from overseas become cheaper when compared to those domestically-produced.
- Businesses may seek to expand the pool of overseas suppliers to further reduce costs and maximise profits.
How will a depreciation of the pound affect businesses which export?
- Sales are likely to rise as products become cheaper when compared to overseas competitors.
- Businesses may choose to increase selling prices to increase profit margins.
How will a depreciation of the pound affect businesses which import?
- Costs are likely to rise as supplies from overseas become more expensive when compared to those domestically-produced.
- Businesses may seek domestic suppliers to reduce costs and maintain profit levels.
What are interest rates?
The interest rate is the percentage charged for borrowing money and the percentage reward offered for saving money.
How does a rise in interest rates affect businesses?
- If they rise, businesses will have to pay more on new or variable rate borrowing which will increase their costs.
- Businesses may be less willing to invest when their retained profit may be more profitably invested into savings schemes.
- Customers are less likely to purchase goods on credit when interest rates are high leading to a fall in sales.
- Exporting businesses may see demand fall for their products overseas as higher rates usually strengthen the pound and make their products more expensive abroad.
What are direct taxes?
Direct taxes are levied on income e.g. income tax and corporation tax.
What are indirect taxes?
Indirect taxes are levied on spending e.g. VAT.
What is the impact of taxation on revenue?
- Revenue may fall for businesses as increased income tax will reduce the disposable income of consumers and so demand may fall. Also, increased VAT will make products more expensive and customers may switch to alternative products.
What is the impact of taxation on costs?
- Operation costs will rise as a result of increased taxes such as VAT and NI contributions. These increased costs mat lead to higher prices for consumers and so lower sales and profits may fall.
- Import costs are increased also when customs duties are raised.
What is the impact of taxation on business decision?
- Business spending an investment may be affected by increases in corporation tax as less profit is retained.
- Businesses may choose to forego business improvement or relocation.
- May take steps to avoid paying specific taxes or pay lower rates of taxation.
What is a recession?
A recession occurs when an economy experiences two consecutive quarters or more of negative economic growth.
What is a boom?
A boom is a period of time where an economy experiences increasing/high rates of economic growth.
What are the characteristics of a recession?
- Increasing/high unemployment
- Low confidence for firms/households
- Low inflation or deflation
- Increase in government expenditure
What are the characteristics of a boom?
- Decreasing unemployment + more vacancies
- High confidence and more risk taken
- Increasing rate of inflation
- Improvement in govt budget as tax revenue rises and expenditure falls
What is economic uncertainty?
Economic certainty occurs when it is difficult to forecast the level of supply and demand in an economy.
Why might economic uncertainty occur?
- Fluctuating exchange rate
- Economics growth uncertainty
- Turbulence in the price of key commodities such as oil
How can businesses ensure they remain prepared for economic uncertainty?
- Building up cash reserves when times are good
- Keeping informed about the economic climate
- Being ready to take advantage of opportunities when they arise
What does the consumer protection legislation state?
It aims to ensure consumers are treated fairly by the companies with which they interact. Products/Services must be:
* Fit for purpose
* Of satisfactory quality
* As described