3.7.5 External Environment : Econmic Change - GDP Flashcards
What are exchange rates
the price of one currency expressed in terms of another currency
What is currency
the system of money in general use in particular country.
For example UK= £
Price elasticity of demand
a measure of the relationship between a change in the quantity demanded of a particular good and a change in its price
Why do businesses buy foreign currencies?
-The main reason is to pay for. goods and services from abroad
- eg sainsburys would sell pounds sterling in order to buy euros on the foreign exchange marketsc
Ways exchange rates impact business activity
price of exports in international markets
costs of goods bought from overseas
revenues and profits earned overseas
converting cash receipts from customers overseas
What might cause an increase in the exchange rate?
- increasing demand for exports = higer demand for the currency
- speculation- traders may bet that the exchnage rate will rise
- an increase in the intrest rates- making it more attractive to hold the currency
- Foreign direct investments into the country = higher demand for currency
Factors affecting the significance of exchange rats of buisnesses
-how much they export to other economies
-whether domestic businesses face strong competition from overseas firms in their market
- how much a business relies on importing goods and services from overseas in order to operate
- the price elasticity of demand (PED) for a buisness products
What is inflation
is a sustained increase in the average price level of an economy
What is deflation
the rate of decrease of the general price level
What is the consumer price index
the main measure of inflation of the UK
What is the rate of inflation measured by
the annual percentage change in the level of prices as measured by the consumer price index
What is the governments target for inflation for the Bank of England and what is the aim of the target
2%
to achieve a sustained period of low and stable inflation
What is low inflation also known as
price stability
Why is the rate of inflation so high in the uk
increasing global commodity prices including oil
higher wage growth in the laybor market
increasing food prices (globally + supermarket price wars)
price inflation in technology products
poorer real economic growth
Two main causes of inflation
demand pull- when there is high demand
cost push- when costs rise
What is demand pull inflation
businesses respond to high demand by raising prices to increase their profit margins
demand-pull inflation is associated with boom phase of the business cycle
Possible cause of demand pull inflation
A depreciation of the exchange rate- increases the price of imports and reduces the foreign price of UK exports
A reduction in direct or indirect taxation- consumers have more disposable income causing more demand
Rising consumer confidence- and an increase in the rate of growth of house prices
Faster rates of economic growth in other countries- providing a boost to UK exports overseas
What is cost push inflation
occurs when costs of production are increasing
Causes of cost push inflation
external shocks
a depreciation in the exchange rate
costs and consequences of inflation
money loses its value and people lose confidence in money as the value of savings is reduced
inflation can get out of control- price increases lead to higher wage demands (wage-price spiral
inflation can disrupt business planning
inflation is a possible cause of unemployment
Why is some inflation good for business
industry-wide price rises enable revenues to grow
growing revenues + constant gross margin = higher gross profit
makes using debt as a source of finance cheaper in real terms
How will firms with inelastic price elasticity of demand affected by inflation
less affected- as demand doesnt change much with a change in price
How does a rise in general inflation affect business costs
sales rev should rise
workers likely to demand higher pay
Labour intensive industries more at risk
How does input cost inflation vary from industry to industry
firms that need to buy significant commodity raw materials may find profit margins squeezed
