3.7.5 External Environment : Econmic Change - GDP

Question 1

What are exchange rates

Answer 1

the price of one currency expressed in terms of another currency

Question 2

What is currency

Answer 2

the system of money in general use in particular country.

For example UK= £

Question 3

Price elasticity of demand

Answer 3

a measure of the relationship between a change in the quantity demanded of a particular good and a change in its price

Question 3

Why do businesses buy foreign currencies?

Answer 3

-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

Question 4

Ways exchange rates impact business activity

Answer 4

price of exports in international markets

costs of goods bought from overseas

revenues and profits earned overseas

converting cash receipts from customers overseas

Question 5

What might cause an increase in the exchange rate?

Answer 5

• 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

Question 6

Factors affecting the significance of exchange rats of buisnesses

Answer 6

-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

Question 7

What is inflation

Answer 7

is a sustained increase in the average price level of an economy

Question 8

What is deflation

Answer 8

the rate of decrease of the general price level

Question 9

What is the consumer price index

Answer 9

the main measure of inflation of the UK

Question 10

What is the rate of inflation measured by

Answer 10

the annual percentage change in the level of prices as measured by the consumer price index

Question 11

What is the governments target for inflation for the Bank of England and what is the aim of the target

Answer 11

2%

to achieve a sustained period of low and stable inflation

Question 12

What is low inflation also known as

Answer 12

price stability

Question 13

Why is the rate of inflation so high in the uk

Answer 13

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

Question 14

Two main causes of inflation

Answer 14

demand pull- when there is high demand

cost push- when costs rise

Question 15

What is demand pull inflation

Answer 15

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

Question 16

Possible cause of demand pull inflation

Answer 16

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

Question 17

What is cost push inflation

Answer 17

occurs when costs of production are increasing

Question 18

Causes of cost push inflation

Answer 18

external shocks
a depreciation in the exchange rate

Question 19

costs and consequences of inflation

Answer 19

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

Question 20

Why is some inflation good for business

Answer 20

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

Question 21

How will firms with inelastic price elasticity of demand affected by inflation

Answer 21

less affected- as demand doesnt change much with a change in price

Question 22

How does a rise in general inflation affect business costs

Answer 22

sales rev should rise
workers likely to demand higher pay
Labour intensive industries more at risk

Question 23

How does input cost inflation vary from industry to industry

Answer 23

firms that need to buy significant commodity raw materials may find profit margins squeezed