2.5.1 Economic Influences

Question 1

What is inflation?

Answer 1

The general rise in prices in an economy over time

Question 2

What is the consumer price index (CPI)?

Answer 2

• Measures monthly changes in the prices of a range of goods and services and compares these changes to earlier periods- calculalting the rate of inlation

Question 3

What does the government monetary policy focus on?

Answer 3

• Focuses on achieving a 2% inflation rate and tasks the bank of England to take steps to mantain this

Question 4

What problems are there that are caused by inflation?

Answer 4

• Increased Costs- Workers often demand higher wages to compensate for the increased cost of living
  Suppliers increase the cost of raw materials and components
  Utilities such as electricity become more expensive
• Higher repayments on loans-Interest rates usually rise
• Consumers change spending habits-Deters consumers from making significant purchases & they may reduce demand for usual lower priced wants
• International competitiveness reduces- Where 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 5

What is an exchange rate and why do they fluctuate?

Answer 5

ER- The value of one currency expressed in terms of another

They fluctuate for reasons including:
- Changing demand for a currency
- Economic growth
- Changes to interest rates

Question 6

What is appreciation?

Answer 6

An increase in the value of the £ against other currencys

Question 7

What is the impact of appreciation on exporting businesses?

Answer 7

• Sales are likely to fall as products become more expensive when compared to overseas competitors
• In order to remain competitive exporting businesses may need to lower prices and accept lower profit margins

Question 8

What is the impact of appreciation on importing businesses?

Answer 8

• Costs are likely to fall as supplies from overseas become cheaper when compared to those domestically produced
• Businesses may seek to expand the pool of overseas suppliers to further reduce costs and maximise profits

Question 9

What is depreciation?

Answer 9

A decrease in the value of the £ against other currencies

Question 10

What is the impact of depreciation on exporting businesses?

Answer 10

• Sales are likely to rise as products become cheaper when compared to overseas competitors
• Businesses may choose to increase selling prices to increase profit margins

Question 11

What is the impact of depreciation on importing businesses?

Answer 11

• Costs are likely to rise as supplies from overseas become more expensive when compared to those domestically produced
• Businesses may seek domestic suppliers to reduce costs and maintain profit levels

Question 12

What is the interest rate?

Answer 12

A percentage reward offered for saving money and the percentage charged for borrowing money

Question 13

What is the impact on a business if interest rates rise?

Answer 13

• Businesses will have to pay more on new or variable rate borrowing which will increase their costs
• Businesses may be less willing to make capital investments when their retained profit may be more profitably invested into savings schemes
• Customers are less likely to purchase goods on credit when interest rates are high leading to a fall in sales
• Exporting businesses may see demand for their products overseas fall as higher interest rates usually strengthen the value of the domestic currency and make their products comparably more expensive abroad

Question 14

Governments impose direct and indirect taxes on businesses and households- what are direct and indirect taxes?

Answer 14

• Direct taxes are levied on income e.g. Income tax and Corporation Tax
• Indirect taxes are levied on spending e.g Value added tax (e.g. VAT)

Question 15

What is the impact on an increase in taxation on revenue for a business?

Answer 15

Revenue may fall for a business
- Increased income tax will reduce the disposable income of customers and demand for products may fall
- Increased VAT will make products more expensive and customers may switch to alternative products

Question 16

What is the impact on an increase in taxation on costs for a business?

Answer 16

• Operating costs will rise as a result of of increased taxes such as VAT
• Higher costs might be offset by charging higher prices
• ## Higher prices may lead to lower sales and profits may fall

Question 17

What is the impact on an increase in taxation for business decisions?

Answer 17

• Business spending & investment may be affected by increases in Corporation tax as less profit will be retained to cover future expenses & make plans for business expansion
• Operational decisions may be affected by increases in business rates and taxes related to employing workers
  Businesses may choose to forego business improvement or relocation, or employ fewer workers as a result of increased costs

Question 18

What is a recession?

Answer 18

When an economy experiences two consecutive quatres (6 months) or more of negative economic growth

Question 19

What is a boom?

Answer 19

A period of time where an economy experiences increasing/high rates of economic growth

Question 20

What are the characterisitcs of a recession and how do these have an impact on a business

Answer 20

Increasing/high unemployment
- Customers have less disposable income and are likely to reduce spending

Low confidence for firms/households
- Businesses may delay spending decisions and focus on reducing risk and survival
- Production levels are likely to be reduced

Increase in government expenditure
-Increased spending on welfare benefits and spending on infrastructure projects to inject demand into the economy may benefit some businesses

Question 21

What are the characterisitcs of an economic boom and how does this impact businesses?

Answer 21

Decreasing unemployment and increasing job vacancies
- Customers’ disposable income increases leading to higher sales revenue
- Recruitment and Staff retention may become more challenging and businesses may need to pay higher wages

High confidence and more risky decisions taken
- Businesses look to expand and maximise profit
- Production levels are likely to be increased

An improvement in the government budget as tax revenues rise and government expenditure falls
- Lower government spending may impact on business growth plans
- Public sector pay controls may cause Industrial unrest and affect business operations

Question 22

When does economic uncertainty occur?

Answer 22

• Occurs when it is difficult to to forecast the level of supply and demand in an economy
• Businesses will find planning difficult and are likely to be reluctant to make significant decisions especially with regards to capital expenditure

Question 23

Why might economic uncertainty occur?

Answer 23

May occur as a result of:
- Fluctuating exchange rate
- Economic growth uncertainty
- Turbulence in the price of key commodities such as oil

Question 24

How can businesses always be prepared for economic uncertaintys?

Answer 24

• Building up cash reserves when times are good
• Keeping informed about the economic climate
• Being ready to take advantage of opportunitys when they arise