2.5.1 Economic Influences Flashcards
define inflation
the general rise in prices in an economy over time
define deflation
overall decrease in the price of goods and services overtime
how can inflation be tracked
- inflation can be tracked using the consumer price index (CPI)
- it tracks the changes in prices of hundreds of goods and services that an average household would regularly buy using inexes
what is the rate of inflation
the percentage change in the price of goods and services in one year compared to another
name and explain the two types of inflation
1 demand pull- when demand is too high for businesses to meet they raise their prices
2 cost-push- rising costs push prices higher
If inflation is high in the UK, UK businesses may be less competitive globally
- this is because exports to other countries will be more expensive so they are less price competitive
what are problems for a business caused by inflation
X increased costs, workers demand higher pay, suppliers increase prices, utilities are more expensive
X interest rates rise
X reduces international competitiveness
X hard to plan and forecast
what are interest rates
- determine the costs of borrowing and the return on savings
what are the two reasons why rising interest rates reduce demand
- high interest rates mean people have higher outgoings if they are paying back borrowed money, this leaves people with lower disposable income to spend
- high interest rates encourage saving and discourage spending
products that require borrowing (houses cars etc.) are _____ likely to be affected by interest rates.
more
bank of England base interest rates tend to influence interest rates nationally
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what are exchange rates
- determine the value of one currency compared to another
what are the reasons for fluctuating exchange rates
- changing demand for a currency
- interest rates
- economic growth
what does appreciation mean
- the value of one currency has increased when compared to another
- it has strengthened
what does depreciation mean
- a decrease in the value of one currency compared to another
- it has weakened
how does appreciation affect exporting businesses
- sales are likely to fall as products are more expensive compared to overseas competitors
- businesses may need to lower prices and sacrifice profit margins
how does appreciation affect importing businesses
- costs are lower from overseas suppliers
- a business may then want to expand overseas suppliers
how does depreciation affect and exporting business
- sales are likely to rise as prices are lower than competitors
- businesses may increase their prices
how does depreciation affect importing businesses
- costs are likely to rise from overseas suppliers
- business may seek domestic suppliers
NOTE: some businesses may rely on both exporting and importing so appreciation or depreciation of the pound is never solely good. Businesses may prefer to have stable exchange rates so that they can easily forecast and set objectives.
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you need to know how to convert currencies in the exam
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how does government spending influence the economy
- governments offer benefits which allow poeple to either spend more or less
- construction of infrastructure could improve supply routes, or could increase customer access and increase demand
what is the difference between direct and indirect taxes
direct- taxes levied on income
indirect- taxes levied on spending
if taxes increase what is the impact on the business
- revenue may fall as customers have less disposable income to pay for goods
- operating costs rise
- business may choose to relocate or size down
- increased profit mean business spending and investment may need to be pulled back
what is the business cycle
- this is the upturns and downturns in the level of a country’s economic activity (GDP) over time
what is a recession
- when an economy experiences two consectutive quarters or more of negative economic growth
what is a boom
- a period of time when the economy experiences increasing/high rates of economic growth
what are the 4 characteristics of a recession
- high unemployment
- low confidence, no risk taking or spending
- low inflation, less spending
- increased government spending
what is economic uncertainty
- when it is difficult tot forecast the level of supply and demand in an economy
why might economic uncertainty occur
- fluctuating exchange rates
- fluctuating prices of key commodities like oil
- changes in legislation
- change in government
what may a business do to counteract uncertainty
- building up cash reserves (emergency funds)
- being ready to take opportunities when they arise
- keeping informed about the economic climate
