2.5.1 Economic influences

Question 1

What is inflation and how is it measured?

Answer 1

The general rise of prices in an economy. Measured using consumer price index

Question 2

What is current UK inflation and what is the target?

Answer 2

2.3% ~ 2% target

Question 3

What are 2 general effects of inflation?

Answer 3

~ Encourages saving
~ Slows down economic growth
~ Businesses become less competitive abroad
~ Interest rates usually increase
~ Value of assets increase

Question 4

What are external influences on economic growth?

Answer 4

Factors beyond the control of the business

Question 5

What are 6 examples of external influences on economic growth?

Answer 5

Political
Economic
Legal
Environmental
Social
Technological

Question 6

What does SPICED stand for?

Answer 6

Strong
Pound
Imports
Cheap
Exports
Dear

Question 7

What are interest rates?

Answer 7

The price of borrowing or saving money

Question 8

What are 4 impacts of increasing interest rates?

Answer 8

~ Consumers save more
~ Consumers
have less disposable income
~ Business costs increase e.g. loans
~ Borrowing more expensive ~ less loans ~ long term impact on productivity

Question 9

What are 4 impacts of decreasing interest rates?

Answer 9

~ Consumers spend more
~ More disposable income
~ Mortgages and loans go down
~ Borrowing less expensive, more loans to use for investment

Question 10

What policy can the government use to affect businesses decision making - explain?

Answer 10

Fiscal policy - involves changing taxation and government expenditure

Question 11

Taxes vary between countries-what is an example of direct and indirect taxes in the UK?

Answer 11

Direct:
Income tax
NI
Corporation tax
Capital gains tax
Inheritance tax
Indirect:
VAT
Excise duties
Customs duties
Council tax
Business rates

Question 12

What is the impact on importers if there is a fall in the value of the £?

Answer 12

Imports more expensive - 2 options:
1. Increase selling price to maintain profit levels
2. Keep price same + lower profit margin

Question 13

What is the impact on exporters if there is a fall in the value of the £? (2)

Answer 13

• Cheaper to purchase in own currency so attracting export markets is easier
• Increase selling price to maximise profits or keep prices same + try to attract new customers

Question 14

What is the impact on importers if there is a rise in the value of the £?

Answer 14

Own currency imports are less expensive - 2 options:
1. Increase margins by keeping selling price the same
2. Reduce selling price to increase sales

Question 15

What is the impact on exporters if there is a rise in the value of the £? (2)

Answer 15

• Becomes more expensive so businesses will find it harder to keep exporters as customers
• Can reduce selling price and reduce profits

Question 16

What are 3 positives impacts of inflation on business?

Answer 16

• Helps with borrowing as long as the interest rate is less than inflation
• Raises the value of property + stock —> can increase capital
• Allows businesses to raise their prices

Question 17

What are 3 negative impacts of inflation on businesses?

Answer 17

• Higher prices can turn customers away especially for luxuries
• Consumers may be price sensitive + look elsewhere
• Suppliers increase prices - puts pressure on businesses to increase their own

Question 18

What are exchange rates + what can they do?

Answer 18

The value of one currency compared to another - can appreciate (become stronger) and depreciate (become weaker)

Question 19

What does it mean if currency appreciates?

Answer 19

Domestic currency buys more foreign currency

Question 20

What does it mean if currency depreciates?

Answer 20

Domestic currency buys less foreign currency

Question 21

Why are exchange rates important for businesses?

Answer 21

They influence the price of imports and exports - can change over time + cause uncertainty when buying and selling with long term trade credit

Question 22

Draw and label the business cycle

Question 23

What does business cycle show?

Answer 23

Fluctuations in the economy

Question 24

What is GDP (gross domestic product)

Answer 24

The output in the economy

Question 25

Explain the boom stage of the business cycle

Answer 25

Period of fast economic growth. Output high due to increased demand + unemployment low

Question 26

Explain the downturn (slump) of the business cycle

Answer 26

Period where economic growth slows down. Levels of output may slow down and unemployment likely to increase

Question 27

Explain recession stage of business cycle

Answer 27

Output may decrease + unemployment levels at the highest. Consumer + business confidence at its lowest

Question 28

Explain recovery stage of the business cycle

Answer 28

Period when economy starts to shows signs of new businesses starting and existing businesses taking on new employees

Question 29

What are the impacts of increased government spending? (4)

Answer 29

• Can create jobs for skilled businesses
• Workers earn money and spend it
• Suppliers of raw materials benefit
• Can encourage competition between businesses

Question 30

What are the impacts of decreased government spending? (3)

Answer 30

• Decrease investments in businesses
• Less competition between businesses
• Less consumer spending

Question 31

How can economic uncertainty affect a businesses decision making?

Answer 31

Economic changes could mean success or failure of long term strategic plans

Question 32

How can economic uncertainty affect businesses?

Answer 32

Unexpected events e.g. recessions will have negative impacts on businesses

Question 33

Who do businesses look to in times of uncertainty?

Answer 33

The government to implement policies to support them

Question 34

How can businesses try to combat uncertainty? (2)

Answer 34

Contingency plans
Preventative measures e.g. multiple suppliers

Question 35

What is the impact of changing taxation on prices of materials for businesses?

Answer 35

Prices may decrease if customs tax is reduced - can encourage imports and exports

Question 36

What is the impact of changing taxation on disposable income for consumers?

Answer 36

If direct taxes increase disposable income will decrease which will impact spending and quality of life