Question 1

What are some examples of external factors that impact the business?

Accepted Answer

Government World events Consumer tastes Economic climate Pressure groups Changes in population Social factors Environmental factors Legislation and regulation

Question 2

What is the definition of appreciation of a currency?

Accepted Answer

- a rise in the value of the currency

Question 3

What is the definition of Base rate?

Accepted Answer

the rate of interest around which a bank structures other interest rates, if the Bank of England raises the base rate, all the other borrowing and savings rates are likely to move in the same direction and vice versa

Question 4

What is the definition of a boom?

Accepted Answer

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

Question 5

What is the definition of the consumer price index (CPI)?

Accepted Answer

-a common measure of price changes used in the EU

Question 6

What is the definition of Deflation?

Accepted Answer

-a fall in the general price level, also used to describe a situation were economic growth is falling or negative when inflation is falling

Question 7

What is the definition of Depreciation (of a currency)?

Accepted Answer

a fall in the value of the currency

Question 8

What is the definition of a downturn?

Accepted Answer

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

Question 9

What is the definition of Economic, trade or business cycle?

Accepted Answer

regular fluctuations in the level of output in the economy

Question 10

What is the definition Exchange rate?

Accepted Answer

the price of one currency in terms of another

Question 11

What is the definition of Fiscal policy?

Accepted Answer

using changes in taxation and government expenditure to manage the economy

Question 12

What is the definition of Government expenditure?

Accepted Answer

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

Question 13

What is the definition of Gross Domestic Product (GDP)?

Accepted Answer

a common measure of national income., output or employment

Question 14

What is the definition of Index linked?

Accepted Answer

the linking of certain payments such as benefits, to the rate of inflation

Question 15

What is the definition of inflation?

Accepted Answer

a general rise in prices

Question 16

What is the definition of monetary policy?

Accepted Answer

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

Question 17

What is the definition of a recession?

Accepted Answer

a less severe form of depression a period of temporary economic decline during which trade and industrial activity are reduced, generally identified by a fall in GDP in two successive quarters.

Question 18

What is the definition of recover or upswing?

Accepted Answer

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

Question 19

What is the definition of a slump or depression?

Accepted Answer

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

Question 20

What is the definition of taxation?

Accepted Answer

the charge made by government on the activities, earnings and income of businesses and individuals

Question 21

How is inflation measured?

Accepted Answer

- a common approach to measuring inflation is to calculate changes in the consumer price index (CPI) - this involves gathering information about the prices of goods and services in the economy - Each month the government records price changes of about 600 goods and services - From these records an average price change is calculated and converted into an index number - this can be compared with previous figure to calculate percentage change prices (i.e. the inflation rate)

Question 22

How can inflation affect businesses?

Accepted Answer

- inflation rates between 1 and 5% are not likely to have a big impact on businesses - however once the CPI gets into double figures and beyond, inflation can have some damaging effects on business, these reasons being: - increased costs - uncertainty - borrowing and lending - consumer reactions - international competitiveness

Question 23

How can inflation rates increase the costs of a businesses?

Accepted Answer

- shoe leather costs (business used to send employees around of foot to find this out hence the name)--> suppliers prices increasing all the time but at different rates, time must be spent searching for the best deal as well as more time tracking competitors prices to decide on what to set yours - Menu costs (because for restaurant when changing prices they need new menus) --> raising your prices costs money, you need to inform customers, brochures might have to be printed and websites updated - hyperinflation --> management is likely to have to spend more time dealing with worker's pay claims, (annual contracts deals instead of 3 year ones), if hyperinflation occurred pay negotiations would have to be monthly, larger risks of strikes as workers and managers have different thoughts about future inflation rates

Question 24

How can inflation cause uncertainty for business?

Accepted Answer

- whether to spend or to save there money --> should they invest now if prices may be higher in 6 months? - long term contracts--> if prices are changing ever 6 months how can a supplier put a price on a 3 year contract when he doesnt even know what the price is going to be in a few months

Question 25

How can inflation affect borrowing and lending for business?

Accepted Answer

- debts that have occurred in the past can be settled quickly as they are eroded by inflation - but in this environment interest rates rise to match inflation, if there is prolonged inflation interest rates are likely to become index linked - linked to the index of prices - so interest rates might charge at the rate of inflation plus 5% or 10%

Question 26

How can inflation affect consumers reactions?

Accepted Answer

- prolonged inflation leads to more saving, and less willing to borrow money - the value of saving tends to fall as inflation erodes their real value --> start to save more to make up for the previous real value - less spending being business make less sales - during hyperinflation consumer spending may differ --> on pay day there would be huge activity in shops as people spend there money as and when they get it --> suppliers of fresh food would have to gear up to deliver all there goods on one day of the week

Question 27

How can inflation affect international competitiveness?

Accepted Answer

- high inflation can impact businesses that import or export goods and services - if the UK has higher inflation rates than its trading partner, UK businesses will become uncompetitive - cheaper to import from overseas business that by UK based products as the prices are rising less quickly

Question 28

What factors can cause inflation?

Accepted Answer

- Cost Push: occurs when there is an increase in the cost of production (including wages, raw materials, taxation and interests rates) that forces firms to increase their prices in order to protect their profit margins. - Demand Pull: the process by which prices rise because there is excess demand in the economy

Question 29

What are some factors can can cause cost push inflation?

Accepted Answer

- Increase in the cost of raw materials - Minimum wage & other wage increases - Skills shortages - Taxation - Energy prices

Question 30

What are the general affects of high inflation rates on a business?

Accepted Answer

- Inflation encourages investment – the value of outstanding debt reduces. - Stock and property prices rise – making balance sheets look healthier - Less resistance to rising prices – especially if national trend - Higher prices may mean lower sales – Price elasticity - Premium price products may suffer – price consciousness - Workers want “Real” wage rises – can cause industrial relation issues

Question 31

What are the general affects of low inflation rates on a business?

Accepted Answer

- Low interest rates – benefits borrowers, hits savers - Low relative to other countries – imports become more expensive, exports appear more competitive - More certainty within the economy – people feel more confident as future prices can be predicted more easily. - Marketing and admin costs lower – less frequent price adjustments - Efficient firms survive, other disappear. In a period of high inflation, firms can hide inefficiencies under price rises.

Question 32

How can deflation cause a problems for a business?

Accepted Answer

- mainly associated with the a fall in demand - consumers delay spending as they think they can make a purchase at a lower price in the future - as a result businesses postpone investment and may lay off workers due to the need to cut production - businesses may have to reduce their prices which can reduces their profits

Question 33

How can deflation be a benefit to a business?

Accepted Answer

- if deflation is the result of falling import prices or the fall in price of commodities it could be positive: - a fall in UK import prices could be the result of a strong pound --> this means imported goods will be cheaper and will put downward pressure on the CPI - this may not have a negative impact on the UK economy as if commodity prices fall, this might reduce the costs of outputs to many businesses - they might respond by actually increasing production

Question 34

What happens when exchange rates fall (weaker pound or stronger foreign currency)?

Accepted Answer

- price for exports --> fall - demand for export --> rises - price for imports --> rises - demand for imports --> lowers

Question 35

What happens when exchange rates rise (stronger pound or weaker foreign currency)?

Accepted Answer

- price for exports --> rises - demand for exports --> falls - price for imports --> falls - demand for imports --> rises

Question 36

How can businesses be affected by exchange rates?

Accepted Answer

-fall in exchange rates --> good for exporters -rise in exchange rates --> good for importers -fluctuating exchanges rates an cause uncertainty --> difficult to predict demand for exports and the cost of imports -another problem is that it usually costs money to switch from on currency to another --> cost for importer thus reduced profits

Question 37

What are the effects of interest rates of costs in general?

Accepted Answer

-changes in interest rates are likely to affect the overheads of a businesses if interest rates rise, businesses are likely to pay higher interest payments on their borrowing --> only if loans are variable

Question 38

What are the effects of interest rates on the costs of loans?

Accepted Answer

Investment projects are often financed through loans A rise in interest rates increases the price of borrowing money Projects financed this way will therefore find that their costs have increased, reducing profitability This could convince some businesses not to venture into new ideas Total investment in the economy will then fail

Question 39

What are the effects of interest rates on the attractiveness if savings?

Accepted Answer

Businesses have the option to save their money rather than investing in things like buildings and machinery A rise in interest rates makes saving more appealing, so a business may decide to save profit in order to make more, shelving their desired investments for when interest rates are not as generous

Question 40

What are the affects of interest rates of paying off existing loans?

Accepted Answer

A rise in interest rates leads to an increase in the cost of existing variable rate borrowing A business could choose to pay off existing loans rather than increasing the investment This will reduce costs It also prevents further risks from borrowing

Question 41

What are the effects of interest rates of a fall in demand?

Accepted Answer

A rise in interest rates is likely to reduce total spending in the economy This might affect the profitability of investment projects A predicted fall in demand may prevent certain projects from going ahead

Question 42

What are the effects of interest rates of domestic consumption?

Accepted Answer

Consumers will be hit by a rise in interest rates The costs of loans will rise This will deter customers from purchasing things using credit, such as cars and furniture; these goods are known as consumer durables because they are used up over a long period. An example of this is housing; consumers are less likely to enter the market because they fear being unable to keep up with the repayments If unemployment begins to rise due to the fall in demand, this will reduce consumer confidence, making consumers even less likely to spend

Question 43

What are the effects of interest rates of domestic investment?

Accepted Answer

Businesses are likely to cut back plans for investment if interest rates rise Investment goods, like houses and machines, are made by businesses These businesses will see a fall in their demand

Question 44

What are the effects of interest rates on stock?

Accepted Answer

Businesses keep stocks of raw materials and finished goods Stocks cost money to keep, because a fall in stock levels could be used to finance a fall in borrowing and interest payments, so a rise in interest rates will increase the price of holding stock This will encourage businesses to de-stock This will be especially true if demand levels change drastically With fewer sales, less needs to be produced, so less stock needs to be kept Cutting stock affects all the businesses that are needed to sell a product; if less stock is needed, less raw materials will be required from the supplier Destocking due to a rise in interest rates therefore causes a fall in demand throughout the industry

Question 45

What are the effects of interest rates on exports and imports?

Accepted Answer

A rise in interest rates tends to lead to a rise in the value of one currency against another A rise in the value of the pound, for example, will make it harder for the UK to export profitably However, foreign businesses will find it cheaper because they will be able to reduce their prices The rise is therefore likely to be a fall in exports and a loss of sales to importers in the domestic market Both will reduce demand and hit UK businesses

Question 46

What is a way that government can affect business decision making?

Accepted Answer

Governments can affect business decision-making using fiscal policy. This involves changing taxation and government expenditure to influence the economy. Taxes vary from country to country but are paid by both businesses and individuals.

Question 47

What are direct taxes?

Accepted Answer

taxes on income

Question 48

What are indirect taxes?

Accepted Answer

taxes of spending

Question 49

What are the main direct taxes in the UK?

Accepted Answer

- Income tax – Paid on personal income and that from paid and self-employment. - National Insurance Contributions (NIC) – Paid by businesses and individuals on employee’s earnings. - Corporation tax – Paid by companies based on how much profit they make - Capital Gains tax – Paid on the capital gain (profit) made when selling an asset. - Inheritance tax – Paid on money transferred to another individual usually after death

Question 50

What are the main indirect taxes in the UK?

Accepted Answer

- Value Added Tax (VAT) – paid mainly when buying goods and services (except food, children’s clothing) - Excise Duties – Paid when buying certain goods such as petrol and tobacco. - Customs Duties – Paid when buying certain goods from abroad. - Council Tax – Paid by residents to the council to help fund local services. - Business Rates – Paid by businesses to the council to help fund local services.

Question 51

What effect does changes in taxation have of businesses?

Accepted Answer

the main areas that are affected are: - consumer spending - prices - business,costs, revenue and profits - business spending and investment - shares - importing and exporting - tax avoidance and evasion - other effects

Question 52

How does taxation effect consumer spending?

Accepted Answer

- Changes in certain types of taxation are likely to increase the income consumers have left after tax. These includes reductions in income tax rates, increase in personal allowance and an increase in the limits on which inheritance tax is paid or a reduction in the rate of inheritance tax. - If consumers have more income left they might increase spending on the products of businesses. - Increase in income tax, National Insurance Contributions and council taxes are likely to leave consumers with less income and could reduce spending on products.

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2.5 External Influences Flashcards

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