2.5.1 economic environment

Question 1

what is a business cycle?

Answer 1

a business cycle observes fluctuations on the level of economic activities, measured by GDP.

Question 2

how is economic activity measured?

Answer 2

by GDP
(gross domestic product)

Question 3

what is gross domestic product?

Answer 3

is the measure of a country’s total output of goods/services over a period of time.

Question 4

what is a peak/boom and its features?

Answer 4

a peak is high rates of economic growth and production
in a peak their is:
- high profits
- low unemployment
- high inflation

Question 5

how does a peak/boom affect businesses?

Answer 5

• they try to expand into new markets
• expand workforce
• try to reduce costs as a result of economies of scale

Question 6

what is a recession and its features?

Answer 6

a recession is a fall in the level of output, growth declines
in a recession their is:
- rise in unemployment
- consumer and business confidence start to fall
- number of business falling

Question 7

how does a recession affect businesses?

Answer 7

• market penetration strategies increase

- try to increase efficiency and cut costs

Question 8

what is a depression and how does it affect businesses?

Answer 8

a depression is a prolonged deep recession leading to a significant fall in output and living standards
in a depression there is:
- high levels of unemployment
- high rates of business failure
- low interest rates

Question 9

how does a depression affect businesses?

Answer 9

• they may scale down production, reduce capacity
• reduce prices
• adapt more redundancies

Question 10

what is the difference between a recession and a depression?

Answer 10

a depression is a prolonged slump where the GDP falls by more than 10%

Question 11

what is a recovery and its features?

Answer 11

a recovery is when the economy starts to pick up after a period of decline
in a recovery their is:
- increase in consumer confidence
- businesses start to invest and take on new employees

Question 12

how does a recovery affect businesses?

Answer 12

• business investments rises
• businesses focus on ways to increase productivity
• new start-ups emerge

Question 13

Define exchange rates?

Answer 13

an exchange is at which one currency will be exchanged for another

Question 14

what is the effect of exchange rates on a business?

Answer 14

• strong pound makes imports cheaper and exports expensive
• if you buy products from another country, the costs could change depending on the exchange rate
• businesses may choose to target a specific international market or economy when the exchange rate is favourable

Question 15

what is appreciation?

Answer 15

an increase in the value of a currency which means its worth more

Question 16

what is depreciation?

Answer 16

a decrease in the value which means it is worth less

Question 17

define inflation?

Answer 17

is the sustained increase in the cost of living or general price, leading to a fall in purchasing power

Question 18

define deflation?

Answer 18

is a decrease in the general price of goods/services. occurs when the inflation rate is below 0%

Question 19

define hyperinflation?

Answer 19

hyperinflation is when prices rise over 50% in a month, usually leading to a loss in confidence in an economy’s currency

Question 20

how does high inflation affect businesses?

Answer 20

• lower levels of consumer spending and a fall in sales for businesses

Question 21

how does low inflation affect businesses?

Answer 21

• businesses feel confident in a stable economic environment
• businesses may look to invest and grow
• low inflation boosts employment. then people have more money to spend

Question 22

how does deflation affect businesses?

Answer 22

• businesses may struggle to pay debts
• low demand may lead to redundancies
• slow growth in sales

Question 23

define interest rates?

Answer 23

is the amount charged by lender per year for borrowing money expressed as percentage of the total money borrowed

Question 24

what is the monetary policy?

Answer 24

involves using interest rates to influence the levels of consumer spending and aggregate demands. it aims to stabilise the economic cycle

Question 25

how does high interest rates affect businesses?

Answer 25

• customer and business spending fall
• inflation falls
• can cause an appreciation in the exchange rate
• stronger £

Question 26

how does low interest rates affect businesses?

Answer 26

• consumer and business spending rise
• inflation may rise
• weaker £

Question 27

what is taxation?

Answer 27

the process of imposing charges on businesses and individuals by the government

Question 28

what are the types of taxes?

Answer 28

• income tax
• national insurance payments
• VAT
• corporation tax
• customs and excise duties

Question 29

how does tax affect businesses?

Answer 29

• if there is a rise in corporation tax it increases cost which may increase prices
• businesses also have to pay environmental tax and VAT, which may also raise prices

Question 30

what is government spending?

Answer 30

the expenditure by the government on supplying goods/services to achieve economic and political objectives

Question 31

what is the expansionary policy?

Answer 31

reduce taxes to increase disposable income.

increase borrowing

Question 32

what is the contractionary policy?

Answer 32

increases taxes to slow down growth and reduce budget deficit

Question 33

how does government spending affect businesses?

Answer 33

• increases government spending means higher taxes
• this then reduces the ability of customer purchases
• then there will be a fall in demand and higher taxes for businesses