2.5.1 Economic influences 💷

Question 1

What are some external influences that influence the economy?

Answer 1

External influences - Go against the businesses control

Exchange rate
legislation
interest rate - 2%
employment
taxation
pressure groups
government

Question 2

What are the two ways we measure inflation?

Answer 2

Demand pull - inflation is driven by demand

Cost pull - Where inflation is driven by the cost of raw materials

Question 3

what does the government want to do with the economy?

Answer 3

Prices stable

Unemployment down

Borrowing down

Growth of economy

Question 4

How is inflation measured?

Answer 4

Through using a consumer price index gathering information about goods and services in the economy

Question 5

Draw an economic business trade cycle

Answer 5

Y axis GDP Gross domestic product

X axis time

Draw line of trend (GDP)
Recession
(going down )
slump (slowest)
growth( line going up )
boom (highest)
recession(going down)

Question 6

Why would a fluctuating inflation be damaging to a business? ( 5 reasons)

Answer 6

1. Increased cost with suppliers - Workers often demand higher wages to compensate for the increase in the cost of living

Suppliers increase the cost of raw materials and components

Utilities such as electricity become more expensive

High cost in Menu costs

2. Uncertainty - Occurs when businesses cannot predict prices even in the short term

Survival may need to become the key business objective until stability returns

Spending and contract decisions are likely to be delayed
Due to high fluctuating inflation

3. Higher repayment on loans

Borrowing and lending can be an opportunity as inflation can cut debt by half benefiting the borrower and not the lender however inflation and interest rates can become index linked

4. Customer reaction - prolonged inflation will lead to more saving less willing to borrow money business will sell

hyperinflation is the type inflation prices change day by day consumers tend to spend wages on payday and huge activity and sales will be made

5.International competitiveness reduces - domestic inflation rates are higher than those in other countries:
UK businesses are less likely to be competitive and lose sales

Imports of overseas competitors are likely to cheaper than domestic goods



Question 7

What do governments have taxation?

Answer 7

To help fund the government

Question 8

What are the two main types of taxes

Answer 8

Direct tax - tax spent on income
Indirect tax - Tax spent on spending

Question 9

What are the Taxes under direct tax

Answer 9

Income tax- based on someone’s income

National insurance - paid by business and individual on earnings

Capital gains tax - based on capital gain whilst selling an asset

Inheritance tax - paid on money by individual after death

Corporation tax - tax based of of how much a business earns

Question 10

What are the 5 indirect taxes ?

Answer 10

VAT - placed in food and services - value added tax

Excise duties - placed on goods like tobacco

Business rates - paid my local business to the council to help fund local service

Council tax - paid by residents bro fund local services

Custom duties - tax placed on goods from abroad

Question 11

What happens to the
economy
Consumer confidence
Employment rates
Interest rates
GDP
And exchange rates during a boom?

Answer 11

Consumer confidence is high resulting to the GDP to grow rapidly as the economy is doing well
Existing firms will be expanding and new ones will be entering the market

Demand will rise - leading to more jobs being made - wages rise
Profits rise

However prices may be rising

Exchange rates - pound will be stronger

Interest rates will be higher as GDP is growing rapidly - need to put a limit


Question 12

What happens to the
economy
Consumer confidence
Employment rates
Interest rates
And exchange rates during a downturn?

Answer 12

Economy is growing at a slower rate - GDP lower- unemployment will rise - demand will decrease
Wage increase will slow down
Prices will rise more slowly
Firms will leave the market

Interest rates will become lower - as customer confidence is low and they are less willing to spend no need for limit

Question 13

What happens to the
economy
Consumer confidence
Employment rates
Interest rates
And exchange rates during a recession?

Answer 13

Weak pound

Economy stops growing

High unemployment rates

Low interest

Low customer confidence

Prices become flat

Question 14

What happens to prices during recovery or upswing ?

Answer 14

They slowly start rising again

Question 15

What is Deflation?

Answer 15

When the general price level starts to fall

Question 16

What is the knock on effect of Deflation

Answer 16

Decrease in GDP -

less consumer spending as people anticipate more lower prices in the future
- lack of demand
- lack of sales
- reduce revenue
- businesses unable to pay wages - lay off staff - increase in unemployment -

Question 17

What are exchange rates

Answer 17

The price of one currency in terms of another

Question 18

How do we put something back in pounds?

Answer 18

Multiply exchange rate

Question 19

How to we turn UK exchange rate into a foreign exchange rate?

Answer 19

Divide

Question 20

How do we showed that there is an appreciation in the exchange rate?

Answer 20

S trong
P ound
I mports
C heaper
E xPorts
D earer

Question 21

Can we show there’s been a depreciation in our exchange rates

Answer 21

W eak
P ound
I mports
D earer
E xports
C heaper

Question 22

How many exchange rates affect businesses competitiveness abroad

Answer 22

less exports - strong pound

Question 23

What Happens to interest rates during inflation?

Answer 23

Increase if it is demand pull-

government
increases it to put a limit on spending to help customers saved rather than overspend

Question 24

How many interest rates in inflation affects investment?

Answer 24

If interest rates are high less borrowing is going to happen - businesses would be less likely to have funds to have new investments

Question 25

What is using interest rate to help control the economy called?

Answer 25

monetary policy 

Question 26

What are the effects of interest rates of costs ?

Answer 26

Effect over head costs - increase debt to pay back

Question 27

What are the 9 effects on business changes of taxation ?

Answer 27

1. Consumer spending
2. prices
3. Business cost revenue and profit
4. Spending and investment
5. Shares
6. Exporting and importing
7. Business operation and employees
8. Other effects
9. Tax avoidance and evasion

Question 28

What is the first effect on businesses of changes in taxation? (What taxes may be effected )

Answer 28

1. Consumer spending - if there is a reduction in income tax or inheritance tax then

there’s going to be more income left for customers to spend

Question 29

What is the second affect on businesses of changes in taxation - what taxes?

Answer 29

 prices - and increase in VAT or excise duty - would lead to increasing costs for the business

which is reflected through the prices of products

an increase in customs duty will need to increase in costs of importing goods into the country

Opposite of decrease!

Question 30

The third effect on businesses of changes in taxation? ( what taxes ?) 

Answer 30

Increase in corporation tax or VAT tax will lead to a rising costs and the business may increase price of products to cover these costs

however this may lead to a decrease in demand and a decrease in sales lead to a decrease in revenue - reduce profits


Question 31

What is The fourth affect on businesses of changes in taxation?

Answer 31

Business borrowing and investment-

Businesses making less profit - going to have less retained profit - unable to pay debt and other expenses

Question 32

What is the fifth effect on businesses of changes in taxation?

Answer 32

Shares-

an increase in capital gains tax and stamp duty

• may deter shareholders -

cause an increase in the price of shares

Question 33

What is the sixth effect on businesses of changes in taxation? (what taxes)

Answer 33

Importing and exporting- If there is an increase in custom duties UK businesses may benefit from it as importing other goods from the other competitors abroad - will be more expensive

Gain competitive advantage for being cheaper

However if you are a business that import supplies from abroad - may be more expensive and increase costs - prices of goods 

Question 34

What is the seventh affect of businesses of changes in taxation? ( what taxes)

Answer 34

Business 👩‍💼 Operations and employees -

if there is an increase in national insurance that will deter employers from recruiting workers - more costs

Changes in taxes will affect how- millage
allowances may benefit workers

Question 35

What is the eighth affect on businesses of changes in taxation? ( what taxes?) 

Answer 35

Landfill tax encourage businesses to recycle ♻️

passenger tax reduces people they take people- making holiday businesses - reduce sales or aeroplane ✈️ businesses

Question 36

What is the ninth of effect on businesses of changes in taxation?

Answer 36

Tax avoidance - Stop hiring too many new workers to avoid paying national insurance tax or

switch up importing to avoid custom duty taxand

Evasion- Evading in the law- Landfill tax dumping in countryside illegal

Question 37

What are the 4 effects on Interest rates on demand ?

Answer 37

Domestic consumption- consumers spend less spent as there is a rise in interest rates less spent on credit

Domestic Investment- businesses less likely to borrow money for new investments like machinery - demand seen to go down

Stocks - costs money to hold - and increase in interest will encourage businesses to destock- however - less sales due to customers being unable to buy on credit - less sales - no need for lots of stock - less demand

Exports and imports - a rise in interest - a rise in value of currency 💷- easier for abroad competitors to charge cheaper prices - gain in demand for them

SPICED
WPIDEC

Question 38

What are the 4 effects on Interest rates on investment ?

Answer 38

Cost of loans - may lead to an increase of total cost
Or
Make businesses less likely to implement investment

Attractiveness of saving - a rise in interest rates would make business more likely to save

Paying off existing loans - cause a rise of interest of loans already taken by business - forces to pay

A fall of demand - a rise in demand- reduce total spending- less sales - less revenue - less inflow - less retained profit - cannot reinvest into business

Question 39

What are the five impacts of the business cycle on the business?

Answer 39

1. output
2. profit
3. business confidence and investment 4. employment
4. business start-ups and closures

Question 40

How is the output impacted of the business cycle on the business?

Answer 40

1. There will be a rise in demand and Increased capacity of luxury goods

Recession and depression- output will fall - cut capacity

Question 41

How may profits impact the business cycle on the business ?

Answer 41

Boom - profits are likely to rise - demand rising - can raise prices

Recession- National income decreased- harder to make profits

Question 42

How may business confidence and investment effect the business cycle ?

Answer 42

Boom- business confidence and investment is high - more optimistic about the future as sales look good - demand high - will launch new product

Recession - business confidence is low - less inclined to take risks and cannot invest in new machinery

Question 43

How may employment impact the business cycle on the business ?

Answer 43

Boom - unemployment falls as businesses need to recruit more people to meet with demand

Recession - unemployment rises - redundancies are made

Question 44

How may business startups and closures impact the business cycle on the business

Answer 44

Businesses more likely to start up in a Boom - demand is high so high opportunity - high business confidence - likely to make a profit

In a Recession - businesses suffer from closures - poor cash flow due to lack of sales - unable to pay costs - non essential business at risk

Question 45

What are the 3 effects of economic uncertainty in the business environment?

Answer 45

Decision making - Makes economic variables unpredictable - making decision making difficult and business confidence low - no investments or projects - deduces business opportunity and inability

2. Unexpected events - economic variables can be volatile- increased interest rate - business unable to pay
3. Business confidence- can effect investment decisions - positive about future more likely to take risks - uncertainly low

USE SWOT to help reduce uncertainty and prep

Question 46

What is the business cycle

Answer 46

A measure of the economic activity showing the boom recession growth and slump

Question 47

What is a cartel ?

Answer 47

a group of businesses collude with each other,

to agree on setting high prices,

in order to improve their profits and dominate the market

Question 48

What is market size ?

Answer 48

Number of customers and sellers in a particular market

Question 49

what is a competitive advantage

Answer 49

Other strengths the business hold of other businesses such a good customer service, higher quality ect