2.5.1 - External Influences Flashcards
Def inflation
The percentage rate at which average prices rise during a year within the whole UK economy
3 circumstances when inflation has a major effect
- when inflation rates are sig above 2%
- when prices are rising faster than average earnings
- when UK inflation is higher than that in most other countries
Positive of inflation
Firms may be able to increase their selling prices to project their profit margins
Positive impacts of high inflation
- industry wide price enables revenues to grow leading to higher gross profit
- makes using debt cheaper - inflation erodes real value of existing debts
- could be cause by higher consumer demand in the economy, before costs start to rise this could increase profit margins
Negative impacts of high inflation
- costs of raw materials rise, increase prices, decrease competitiveness
- so businesses have contracts at fixed prices meaning can’t increase prices
- rising inflation associated with higher interest rates - reducing economic growth
Def exchange rate
Is the value of one currency expressed in terms of another
As the pound appreciates
- UK exports get more expensive so sales volumes slips
- imports to UK get cheaper making it harder for firms to compete
What happens when the pound depreciates
- as UK exports get cheaper, the sales volumes rise
- imports get more expensive so UK firms can compete more effectively
Acronym SPICED
Strong pound imports cheaper exports dearer
Def interest rate
Is the reward for saving and the cost of borrowing expressed as a percentage of the money saved or borrowed
When interest rates go up, businesses are disadvantages in 4 ways
- interest on saving goes up, people save rather than spend
- business costs of debt repayment will rise
- the amount consumers may on loans/ credit cards goes up
- consumers have less money to spend on goods
If interests go down, 4 ways businesses benefit
- the amount consumers pay on loans/ credit cards goes down
- the interest on saving goes down, people more likely to spend
- consumers have more money to spend on goods
- business costs of debt repayment will fall
Why do governments change levels of taxation and government spending
To manage the economy, create stable economic growth
2 ways government help to reduce the level of unemployment
- extra spending on road-building, health and other services
- reduce income tax to enable families to spend more of the money they earn
2 things government does to cut the growth rate when it is rising too fast
- cut spending on health, education to take spending from economy
- increase income tax to force people to think harder and more carefully about what they buy
2 things government does to improve competitiveness of British firms
- extra spending on education
- cut company taxation
2 things government does to cut the rate of imports, especially of consumer goods
- cut benefits to reduce people ability to buy exports
- increase VAT in all goods other than food and drinnk
Effect of business cycle on businesses dependant on
Price elasticity of demand
4 stages of a business cycle
Boom, recession, depression and recovery
Description of boom
- high levels of consumer spending
- prices and costs tend to rise faster
- low unemployment
Description recession
- falling levels of consuming spending and confidence means lower profits for businesses
Description of depression
- very weak consumer spending and business investment
- many businesses fail, rapidly rising unemployment
Description recovery
Things start to get better, consumers begin to increase spending, business starts to invest again
Ideal economy
Economic stability to the uncertainty that comes with cyclical economic growth
Why do directors warn economic stability
To be sure the money they spend will be recovered and generate a profit
