2.5.1 Economic Influences

Question 1

•The economic environment consists of

Answer 1

the key economic factors that influence the behaviour of businesses and their customers

Question 2

The business cycle shows

Answer 2

shows fluctuations in the level of economic activities

Question 3

Economic activity is measured by

Answer 3

GDP

Question 4

GDP is

Answer 4

•GDP is the total value of a country’s output in a year

Question 5

What is inflation

Answer 5

• A general rise in prices or a fall in the value of money

* The rate of inflation shows how prices have changed based on the same period a year earlier

Question 6

What are the two main measurements of inflation

Answer 6

●Retail Price Index (RPI) – a measurement of a ‘basket’ of goods and services representative of what people buy in the UK
●Consumer Price Index (CPI) – similar to RPI but mainly excluding housing costs

Question 7

Inflation effect on the business

Answer 7

●Increased costs due to higher inflation
●can be passed onto the consumer if the product is price inelastic
●if not the firm will have to try and absorb the increased costs through lower profit margins
●this has an impact on the pricing strategy of a firm
●some firms will reduce the supply of the product, having a major affect on operations management as capacity is reduced and the firm rationalises with a greater focus on cost minimisation
●it becomes increasingly difficult to maintain competitiveness

Question 8

Define exchange rates

Answer 8

The price of one currency in terms of another e.g. £1 = $1.50

Question 9

Define appreciation

Answer 9

An increase in the value of a currency is called an appreciation this means the currency is worth more e.g. £1 = $1.60

Question 10

Define depreciation

Answer 10

●A decrease in the value of a currency is called a depreciation this means the currency is worth less e.g. £1 = $1.40

Question 11

Describe SPICED

Answer 11

●SPICED (strong pound: imports cheaper, exports dearer)
●Firms that import will be able to buy cheaper raw materials and finished goods
●Firms that export will see less demand

Question 12

Describe WPIDEC

Answer 12

● WPIDEC (weak pound: imports dearer, exports cheaper)
●There will be greater demand from abroad for UK goods
●Input prices will increase if raw materials are imported
●If the firm has a price inelastic product it will be able to pass the increase in costs onto the consumer

Question 13

Define interest rates

Answer 13

•The price of money i.e. the cost of borrowing or the reward for saving

Question 14

What is interest effects on the business

Answer 14

•The effect on business:
●If a firm has loans or overdrafts this will effect the amount that has to be paid in interest which is a cost to a business
●Investments either become more or less attractive influencing the ability of firms to grow by investing in new capital equipment or larger premises
●Influences the level of demand by consumers
●If interest rates are high saving is more attractive and spending less attractive
●Interest rates will affect customers willingness to spend on credit
●High interest rates will mean that consumers have less disposable income e.g. higher mortgage payments and therefore a fall in demand for other products
●Higher interest rates mean that foreign investors will invest in UK banks for higher returns and therefore an increase in demand for the £ will see its value appreciate – making exports dearer

Question 15

Define taxation

Answer 15

•Taxation is the process of imposing charges on business and individuals by the government

Question 16

Taxation effects on a business

Answer 16

• A cut in income tax may give consumers more disposable income, thus raising consumption
• However If income tax is raised this may discourage spending and reduce consumption
• A cut in corporation tax may increase available profits for firms which may stimulate investment
• Changes to VAT will affect the price to consumers and also the costs to a business

Question 17

Define government spending

Answer 17

•The expenditure by the government on supplying goods and services to achieve economic and political objectives

Question 18

Government spending effect on the business

Answer 18

• Budgets allocated to public sector organisations e.g. NHS, schools and armed forces will affect demand for suppliers to these organisations
• Spending on infrastructure e.g. road repairs will generate employment increasing incomes and therefore general levels of demand
• Benefits paid will affect levels of disposable income amongst recipients
• Pay rates to public sector workers will affect levels of disposable income amongst recipients

Question 19

Describe the business cycle

Answer 19

Boom
Recession
Slump
Recovery

Question 20

Describe economic uncertaintys

Answer 20

• The economic environment is uncertain and prone to shocks
• Shocks are unpredictable events
• These can happen in the microeconomic environment, affecting the actions of individual consumers and suppliers or in the macroeconomic environment affecting the actions of the economy as a whole