2.5.1 Economic Influences

Question 1

What is economic influence?

Answer 1

Economic influence is when a business is affected in any way by economic factors e.g. inflation, exchange rates etc.

Question 2

What is inflation?

Answer 2

How much higher or lower prices are compared with the same month a year earlier.

Question 3

What is a Consumer Price Index?

Answer 3

CPI looks at the prices of hundreds of things we commonly spend money on.

Question 4

How are businesses affected by changes in inflation?

Answer 4

-As inflation rises so does the cost of products and services.

-As costs go up due to inflation, business owners may need to increase their prices to maintain profitability, squeezing profit margins.

Question 5

What is depreciation?

Answer 5

A fall in £pound.

Question 6

What does SPICED stand for?

Answer 6

-Strong
-Pound
-Imports
-Cheaper
-Exports
-Dearer

Question 7

What does WPIDEC stand for?

Answer 7

-Weak
-Pound
-Imports
-Dearer
-Exports
-Cheaper

Question 8

What are interest rates?

Answer 8

Interest rates means the cost of borrowing money.

Question 9

How do interest rates affect a business?

Answer 9

-If interest rates rise then the cost of borrowing will rise and this will mean that the cost of supplies for a business may increase.
-A fall in interest rates means that the cost of lending falls which may lead to an increase in profits.

Question 10

How is a business affected by changes in taxation?

Answer 10

-Lower taxes can result in more demand in the economy and lead to higher output and employment

-

Question 11

What are the 4 main taxation’s for small businesses?

Answer 11

1.) Income taxes
2.) VAT
3.) Business rates
4.) NI

Question 12

What are the 4 main taxation’s for large businesses?

Answer 12

1.) Corporation tax (20%)
2.) VAT (20%)
3.) Business rates
4.) NI contributions to employees

Question 13

What are excise duties?

Answer 13

Excise duty has to be paid by customers on products that have negative effects on society.

Question 14

How may government spending effect businesses?

Answer 14

Cut in government spending impacts on businesses that supply to public organisations.

Question 15

What is appreciation?

Answer 15

There is a rise in the £pound against other currencies meaning the £pound can buy more foreign currency (strong pound.)

Question 16

How can inflation be measure by CPI?

Answer 16

-Imagine a shopping basket of all products/services bought.
-Movement in consumer price index indices represent the changing cost of the shopping basket, this is how inflation is measured.

Question 17

Interest rates - Cost of borrowing

Answer 17

-If interest rates on a loans are low then consumers may borrow money to buy; a car, sofa, holiday etc. = ^ demand.
-If interest rates go up then consumers will not borrow and so will save instead = bad forUK businesses that sell products/services that are heavily financed.

Question 18

Taxation and VAT

Answer 18

-If the % of VAT goes up a business could pass this cost on to the consumer so it makes good more expensive to buy, or absorb the cost = shrunken profit margins.

Question 19

What are the 4 factors of a business cycle?

Answer 19

1.) Boom
2.) Recession
3.) Slump
4.) Recovery

Question 20

1.) Boom

Answer 20

-A country may enjoy a period high consumer spending.
-^ demand for goods/services.
-^ in work, lower unemployment + ^ wages.
-More people in work able to buy goods + services.

Question 21

2.) Recession

Answer 21

-Countries experience falling levels of demand.
-Consumers seek to save their money in sated of save.
-Redundancies to lower costs and lower profits.

Question 22

3.) Slump

Answer 22

-Consumer spending at it’slowest.
-Very little investment in businesses + high levels of unemployment as demand falls to it’s lowest.

Question 23

4.) Recovery

Answer 23

-Demand levels start to improve.
-Unemployment starts to fall as businesses take on workers due to ^ demand.
-Consumers start to buy larger items again.

Question 24

How does economic uncertainty affect the business environment?

Answer 24

-Uncertainty means that with a risk of unemployment, consumers delay the purchase of goods.
-Demand falls.
-Manufacturers are reluctant to expand = reduced supply.