2.5.1 Economic influences 💷 Flashcards
What are some external influences that influence the economy?
External influences - Go against the businesses control
Exchange rate
legislation
interest rate - 2%
employment
taxation
pressure groups
government
What are the two ways we measure inflation?
Demand pull - inflation is driven by demand
Cost pull - Where inflation is driven by the cost of raw materials
what does the government want to do with the economy?
Prices stable
Unemployment down
Borrowing down
Growth of economy
How is inflation measured?
Through using a consumer price index gathering information about goods and services in the economy
Draw an economic business trade cycle
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)
Why would a fluctuating inflation be damaging to a business? ( 5 reasons)
- 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
- 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
- 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

What do governments have taxation?
To help fund the government
What are the two main types of taxes
Direct tax - tax spent on income
Indirect tax - Tax spent on spending
What are the Taxes under direct tax
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
What are the 5 indirect taxes ?
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
What happens to the
economy
Consumer confidence
Employment rates
Interest rates
GDP
And exchange rates during a boom?
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

What happens to the
economy
Consumer confidence
Employment rates
Interest rates
And exchange rates during a downturn?
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
What happens to the
economy
Consumer confidence
Employment rates
Interest rates
And exchange rates during a recession?
Weak pound
Economy stops growing
High unemployment rates
Low interest
Low customer confidence
Prices become flat
What happens to prices during recovery or upswing ?
They slowly start rising again
What is Deflation?
When the general price level starts to fall
What is the knock on effect of Deflation
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 -
What are exchange rates
The price of one currency in terms of another
How do we put something back in pounds?
Multiply exchange rate
How to we turn UK exchange rate into a foreign exchange rate?
Divide
How do we showed that there is an appreciation in the exchange rate?
S trong
P ound
I mports
C heaper
E xPorts
D earer
Can we show there’s been a depreciation in our exchange rates
W eak
P ound
I mports
D earer
E xports
C heaper
How many exchange rates affect businesses competitiveness abroad
less exports - strong pound
What Happens to interest rates during inflation?
Increase if it is demand pull-
government
increases it to put a limit on spending to help customers saved rather than overspend
How many interest rates in inflation affects investment?
If interest rates are high less borrowing is going to happen - businesses would be less likely to have funds to have new investments
What is using interest rate to help control the economy called?
monetary policy 
What are the effects of interest rates of costs ?
Effect over head costs - increase debt to pay back
What are the 9 effects on business changes of taxation ?
- Consumer spending
- prices
- Business cost revenue and profit
- Spending and investment
- Shares
- Exporting and importing
- Business operation and employees
- Other effects
- Tax avoidance and evasion
What is the first effect on businesses of changes in taxation? (What taxes may be effected )
- 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
What is the second affect on businesses of changes in taxation - what taxes?
 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!
The third effect on businesses of changes in taxation? ( what taxes ?) 
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

What is The fourth affect on businesses of changes in taxation?
Business borrowing and investment-
Businesses making less profit - going to have less retained profit - unable to pay debt and other expenses
What is the fifth effect on businesses of changes in taxation?
Shares-
an increase in capital gains tax and stamp duty
- may deter shareholders -
cause an increase in the price of shares
What is the sixth effect on businesses of changes in taxation? (what taxes)
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 
What is the seventh affect of businesses of changes in taxation? ( what taxes)
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
What is the eighth affect on businesses of changes in taxation? ( what taxes?) 
Landfill tax encourage businesses to recycle ♻️
passenger tax reduces people they take people- making holiday businesses - reduce sales or aeroplane ✈️ businesses
What is the ninth of effect on businesses of changes in taxation?
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
What are the 4 effects on Interest rates on demand ?
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
What are the 4 effects on Interest rates on investment ?
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
What are the five impacts of the business cycle on the business?
- output
- profit
- business confidence and investment 4. employment
- business start-ups and closures
How is the output impacted of the business cycle on the business?
- There will be a rise in demand and Increased capacity of luxury goods
Recession and depression- output will fall - cut capacity
How may profits impact the business cycle on the business ?
Boom - profits are likely to rise - demand rising - can raise prices
Recession- National income decreased- harder to make profits
How may business confidence and investment effect the business cycle ?
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
How may employment impact the business cycle on the business ?
Boom - unemployment falls as businesses need to recruit more people to meet with demand
Recession - unemployment rises - redundancies are made
How may business startups and closures impact the business cycle on the business
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
What are the 3 effects of economic uncertainty in the business environment?
Decision making - Makes economic variables unpredictable - making decision making difficult and business confidence low - no investments or projects - deduces business opportunity and inability
- Unexpected events - economic variables can be volatile- increased interest rate - business unable to pay
- Business confidence- can effect investment decisions - positive about future more likely to take risks - uncertainly low
USE SWOT to help reduce uncertainty and prep
What is the business cycle
A measure of the economic activity showing the boom recession growth and slump
What is a cartel ?
a group of businesses collude with each other,
to agree on setting high prices,
in order to improve their profits and dominate the market
What is market size ?
Number of customers and sellers in a particular market
what is a competitive advantage
Other strengths the business hold of other businesses such a good customer service, higher quality ect 
