2.5.1 Economic influences Flashcards
causes for inflation
- cost push inflation (costs to business rise and passed on to customers)
- demand pull inflation (increase in number of people who want something whose supply cant keep up)
2 reasons for rises due to cost push inflation
- price of raw materials increase
- wages start to rise = compensate higher prices
firms = increase prices = inflationary cycle again
2 reasons for demand pull inflation
- consumer spending strong
- cant keep up with demand
increase prices
high inflation
prices go up and value of money goes down
3 positive impacts of high inflation on businesses
- prices rise = revenues = increase gross profit
- debt as SOF cheaper (real terms) erodes real value of existing debts if debt repayment terms are fixed
- higher consumer demand=increase profit (before costs)
3 negative impacts of high inflation on businesses
- cost of raw materials rise = price, protect margins = international competitiveness
- contracts at fixed price = raw materials increase cant increase price = decrease profit margin
- higher interest rates and decrease economic growth (demand) = recession
imports and exports
import raw materials and components
export finished goods
imports > exports
suffer from decrease in exchange rate
imports < exports
benefit from decrease in exchange rates
appreciation
SPICED STRONG POUND IMPORTS CHEAP EXPORTS DEAR
depreciation
WPIDEC WEAK POUND IMPORTS DEAR EXPORTS CHEAP
unemployment
someone is willing and able to work but is unable to find a job
impact of high unemployment on businesses?
4 adv
3 dis
adv: 1"pool" of labour to chose from 2low wage growth 3demand for inferior rise 4low staff turnover
dis:
1disposable income = less elastic goods
2low morale and uncertainty in work force
3social problems may rise e.g. shoplifting
impact of low unemployment on businesses?
2 adv
3 dis
adv:
1disposable income
2moral/motivation
dis:
1upward pressure on wages
2high staff turnover = headhunting
3harder to recruit
changing demand in economy
2 methods to control
2 methods to control demand for goods and services:
- monetary policy
- fiscal policy
monetary policy
(Bank of England)
control demand by increasing/decreasing interest rates
fiscal policy
(government)
control demand by increasing/decreasing taxes
interest rate policy
expressed as a % of money saved or borrowed
controlled by monetary policy committee part of Bank of England
4 impacts of changes in interest rate policy
interest rate goes up
businesses are disadvantaged
- consumers loans/credit cards goes up
- interest on savings goes up, (save not spend)
- consumers = disposable income less
- costs of debt repayments will rise
impact of changes in interest rate policy
interest rate goes down
businesses benefit
- consumers loans/credit cards down
- savings goes down = spend
- business costs of debt repayments will fall
2 methods to control demand for goods/services in economy:
- monetary policy
2. fiscal policy (increasing/decreasing taxes or government spending (expenditures))
types of taxes
2 types:
- direct (tax on income or profits)
- indirect (tax on goods/services)
expansionary fiscal policy
cut taxes:
personal income = disposable income = demand
indirect taxes = lower costs & prices= demand
corporation tax = post tax profits = bus capital spending or investment
tax on interest from saving = disposable income on net savings = demand
business cycle
y-axis = GDP growth
- boom
- recession
- slump
- recovery
- boom
- recession
boom
consumer spending = rev (normal good) profit =demand
business confidence,
price and costs tends to rise faster (inflation) unemployment low
upward pressure on wages, high bus inv CU
pressure on wages
upward pressure on wages high inflation = increase in wages= rising prices & maintain living standards
recession
less spending (inferior) and confidence = profits = less inv spare capacity increase = demand falls , increase unemployment = downward wage pressure
decrease cost and inflation= increase
job vacancies = lots of applicants
slump/depression
very weak consumer spending and bus investment, many bus failure, rapid rising unemployment prices falling
really low sales/rev/profit (unless inferior)
some - out of bus, decrease competitors, bus profits very low prices and sales rev fall = make a loss, cut costs = survive, and capacity inv unlikely
recovery
positive growth and a move out of recession
things begin to improve cons begin to increase spending, bus = more confident and start invest again = time for unemployment to stop growing
sales/rev/profit being to increase
costs not yet rising unemployment still high = no upward pressure on wages
bus inv = may start to increase, still cautious
falling inflation rate
2% to 1%
prices not going down, just rising more slowly
deflation
rare: average prices are falling
- 1.5%
