2.5.1 Economic influences Flashcards
What is inflation and how is it measured?
The general rise of prices in an economy. Measured using consumer price index
What is current UK inflation and what is the target?
2.3% ~ 2% target
What are 2 general effects of inflation?
~ Encourages saving
~ Slows down economic growth
~ Businesses become less competitive abroad
~ Interest rates usually increase
~ Value of assets increase
What are external influences on economic growth?
Factors beyond the control of the business
What are 6 examples of external influences on economic growth?
Political
Economic
Legal
Environmental
Social
Technological
What does SPICED stand for?
Strong
Pound
Imports
Cheap
Exports
Dear
What are interest rates?
The price of borrowing or saving money
What are 4 impacts of increasing interest rates?
~ Consumers save more
~ Consumers
have less disposable income
~ Business costs increase e.g. loans
~ Borrowing more expensive ~ less loans ~ long term impact on productivity
What are 4 impacts of decreasing interest rates?
~ Consumers spend more
~ More disposable income
~ Mortgages and loans go down
~ Borrowing less expensive, more loans to use for investment
What policy can the government use to affect businesses decision making - explain?
Fiscal policy - involves changing taxation and government expenditure
Taxes vary between countries-what is an example of direct and indirect taxes in the UK?
Direct:
Income tax
NI
Corporation tax
Capital gains tax
Inheritance tax
Indirect:
VAT
Excise duties
Customs duties
Council tax
Business rates
What is the impact on importers if there is a fall in the value of the £?
Imports more expensive - 2 options:
1. Increase selling price to maintain profit levels
2. Keep price same + lower profit margin
What is the impact on exporters if there is a fall in the value of the £? (2)
- 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
What is the impact on importers if there is a rise in the value of the £?
Own currency imports are less expensive - 2 options:
1. Increase margins by keeping selling price the same
2. Reduce selling price to increase sales
What is the impact on exporters if there is a rise in the value of the £? (2)
- Becomes more expensive so businesses will find it harder to keep exporters as customers
- Can reduce selling price and reduce profits
What are 3 positives impacts of inflation on business?
- 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
What are 3 negative impacts of inflation on businesses?
- 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
What are exchange rates + what can they do?
The value of one currency compared to another - can appreciate (become stronger) and depreciate (become weaker)
What does it mean if currency appreciates?
Domestic currency buys more foreign currency
What does it mean if currency depreciates?
Domestic currency buys less foreign currency
Why are exchange rates important for businesses?
They influence the price of imports and exports - can change over time + cause uncertainty when buying and selling with long term trade credit
Draw and label the business cycle
What does business cycle show?
Fluctuations in the economy
What is GDP (gross domestic product)
The output in the economy
Explain the boom stage of the business cycle
Period of fast economic growth. Output high due to increased demand + unemployment low
Explain the downturn (slump) of the business cycle
Period where economic growth slows down. Levels of output may slow down and unemployment likely to increase
Explain recession stage of business cycle
Output may decrease + unemployment levels at the highest. Consumer + business confidence at its lowest
Explain recovery stage of the business cycle
Period when economy starts to shows signs of new businesses starting and existing businesses taking on new employees
What are the impacts of increased government spending? (4)
- Can create jobs for skilled businesses
- Workers earn money and spend it
- Suppliers of raw materials benefit
- Can encourage competition between businesses
What are the impacts of decreased government spending? (3)
- Decrease investments in businesses
- Less competition between businesses
- Less consumer spending
How can economic uncertainty affect a businesses decision making?
Economic changes could mean success or failure of long term strategic plans
How can economic uncertainty affect businesses?
Unexpected events e.g. recessions will have negative impacts on businesses
Who do businesses look to in times of uncertainty?
The government to implement policies to support them
How can businesses try to combat uncertainty? (2)
Contingency plans
Preventative measures e.g. multiple suppliers
What is the impact of changing taxation on prices of materials for businesses?
Prices may decrease if customs tax is reduced - can encourage imports and exports
What is the impact of changing taxation on disposable income for consumers?
If direct taxes increase disposable income will decrease which will impact spending and quality of life
