2.5.1 economic environment Flashcards
what is a business cycle?
a business cycle observes fluctuations on the level of economic activities, measured by GDP.
how is economic activity measured?
by GDP (gross domestic product)
what is gross domestic product?
is the measure of a country’s total output of goods/services over a period of time.
what is a peak/boom and its features?
a peak is high rates of economic growth and production in a peak their is: - high profits - low unemployment - high inflation
how does a peak/boom affect businesses?
- they try to expand into new markets
- expand workforce
- try to reduce costs as a result of economies of scale
what is a recession and its features?
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
how does a recession affect businesses?
- market penetration strategies increase
- try to increase efficiency and cut costs
what is a depression and how does it affect businesses?
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
how does a depression affect businesses?
- they may scale down production, reduce capacity
- reduce prices
- adapt more redundancies
what is the difference between a recession and a depression?
a depression is a prolonged slump where the GDP falls by more than 10%
what is a recovery and its features?
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
how does a recovery affect businesses?
- business investments rises
- businesses focus on ways to increase productivity
- new start-ups emerge
Define exchange rates?
an exchange is at which one currency will be exchanged for another
what is the effect of exchange rates on a business?
- 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
what is appreciation?
an increase in the value of a currency which means its worth more
what is depreciation?
a decrease in the value which means it is worth less
define inflation?
is the sustained increase in the cost of living or general price, leading to a fall in purchasing power
define deflation?
is a decrease in the general price of goods/services. occurs when the inflation rate is below 0%
define hyperinflation?
hyperinflation is when prices rise over 50% in a month, usually leading to a loss in confidence in an economy’s currency
how does high inflation affect businesses?
- lower levels of consumer spending and a fall in sales for businesses
how does low inflation affect businesses?
- 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
how does deflation affect businesses?
- businesses may struggle to pay debts
- low demand may lead to redundancies
- slow growth in sales
define interest rates?
is the amount charged by lender per year for borrowing money expressed as percentage of the total money borrowed
what is the monetary policy?
involves using interest rates to influence the levels of consumer spending and aggregate demands. it aims to stabilise the economic cycle
how does high interest rates affect businesses?
- customer and business spending fall
- inflation falls
- can cause an appreciation in the exchange rate
- stronger £
how does low interest rates affect businesses?
- consumer and business spending rise
- inflation may rise
- weaker £
what is taxation?
the process of imposing charges on businesses and individuals by the government
what are the types of taxes?
- income tax
- national insurance payments
- VAT
- corporation tax
- customs and excise duties
how does tax affect businesses?
- 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
what is government spending?
the expenditure by the government on supplying goods/services to achieve economic and political objectives
what is the expansionary policy?
reduce taxes to increase disposable income.
increase borrowing
what is the contractionary policy?
increases taxes to slow down growth and reduce budget deficit
how does government spending affect businesses?
- 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
