41. Economic Influences

Question 1

External influences:

Answer 1

• Inflation
• Exchange rates
• Interest rates
• Taxation
• Government expenditure
• The business cycle

Question 2

Inflation

Answer 2

a general rise in prises

Question 3

How is inflation measured?

Answer 3

Inflation is measured by calculating changes in consumer price index (CPI). This involves gathering information about the prices of goods and services in the economy.

Question 4

consumer price index (CPI)

Answer 4

A common measure of price changes used in amny countries

Question 5

How does inflation affect businesses?

Answer 5

• Increased costs
• Uncertainty
• Borrowing and lending
• Consumer reactions
• International competitiveness

Question 6

How might businesses respond to inflation?

Answer 6

• Search for cheaper suppliers
• Increase prices to compensate for the higher costs resulting from inflation
• negotiate hard with employers and their representatives when inflation-proof wage demands are made
• Build up inventories ahead of further inflation so that products are sold at future higher prices
• Look to outsource or relocate production overseas if domestic costs continue to rise

Question 7

Exchange rates

Answer 7

the price of one currency in terms of another

Question 8

How might businesses respond to a change in exchange rates?

Answer 8

• Appreciation:
  · An export business will find that the price of its products will be higher for overseas customers when the exchange rates appreciates. Therefore trading conditions hav worsened.
• Deppreciation:
  · An export business will find that the price of its products will be lower for overseas customers when the exchange rates appreciates. Therefore trading conditions hav improved.

Question 9

Interest rates

Answer 9

If a business or an individual borrows money, they usually have to pay interest on the loan. Equally if they put their savings into a bank or society, they expect to receive interest.

Question 10

monetary policy

Answer 10

Using changes in interest rate and money supply to manage the economy

Question 11

Effect of interest rates on costs

Answer 11

If interests rates rise, business are likely to have to pay higher interest payments on their borrowing.

Question 12

variables rates means that…

Answer 12

banks or other lenders are free to change the rate of interest on any money borrowed

Question 13

fixed rates menas that…

Answer 13

the bank cannot change the rate of interest over the agreed term of the loan

Question 14

Effect of interest rates on investments

Answer 14

• The costs of loans (more interest so this might persuade some businesses to cancel investment plans)
• Attractiveness of saving (might persuade to cancel investment and save the funds instead)
• Paying off existing loans (a business could choose to pay off existing loans rather than increase its investment)
• A fall in demand (spending in the total economis isr educed therfore business don’t plan investment projects)

Question 15

Effect of interest rates on demand

Answer 15

• Domestic consumption (costs of loans rising discourages consumers from buying goods)
• Domestic investment (business cuts plans of investement therefore these business will see a fall in demand)
• Stock (encourages business to destock)
• Exports and imports (a rise in interest rates tends to lead to a rise in the value of one currency against others, so the result is likely to be a fall in exports and a loss of sales to importers in the domestic market)

Question 16

How business react to higher interest rates:

Answer 16

-reduce the amount they borrow by cutting on loans and overdrafts
- postpone or cancel marginal investment projects
- some businesses might react by modifying growth targets
- businesses with a wide range of financial assets might begin to put more money into deposit accounts as returns will be greater

Question 17

How business react to lower interest rates:

Answer 17

• Increase investment as returns will be higher if the costs of borrowing are lower
• since demand for some goods will rise, businesses will have to prepare to increase production (recruit more staff and increase their productive capacity)
• some businesses may decide that thay can increase their prices if demand is growing fast, this will help to boost revenue and profits (particularly if demand is inelastic)

Question 18

fiscal policy

Answer 18

using changes in taxation and government expenditure to manage the economy

Question 19

taxation

Answer 19

The charges made by government on the activities, earnings and income ofo business and individuals

Question 20

governmental expenditure

Answer 20

the amount spent by the governemnt in its provision of public services

Question 21

Direct taxes:

Answer 21

(TAXES ON INCOME)
- Income tax
- National insurance contributions
- Corporation tax
- Capital gains tax
- Inheritance tax

Question 22

Indirect taxes:

Answer 22

(TAXES ON SPENDING)
- Value added tax (VAT)
- Excise duties
- Customs duties
- Council tax
- Business rates

Question 23

Effect on businesses of changes in taxation:

Answer 23

• Consumer spending
• Prices
• Business costs, revenues and profits
• Business spending and investment
• Shares
• Importing and exporting
• Business operations and employees
• tax avoidance and evasion

Question 24

Effect on businesses of changes in government expenditure:

Answer 24

• When governemnt debt becomes too high, the interest payments rise and are seen as burden
• Cuts in governt expenditure are generally bad for businesses because it usually means a fall in demand.

Question 25

How might businesses respond to changes in government expenditure:

Answer 25

• Many businesses will react positively to higher levels of govenrment expenditure because demand in the econonmy tends to rise and the business might increase production and expand
• Too much spending in the public sector means that private sector finds it harder to attract resources and business might have to raise prices rather than to invest and expand

Question 26

The business cycle:

Answer 26

• Boom
• Downturn
• Recession or depression
• Recovery or upswing

Question 27

gross domestic product (GDP)

Answer 27

a common measure of national income, output or employment

Question 28

boom

Answer 28

the peak of the economic cycle where GDP is growing at its fastest

Question 29

downturn

Answer 29

a period in the economic cycle where GDP grows, but more slowly

Question 30

slump or depression

Answer 30

the bottom of the economic cycle where GDP starts to fall with significant increases in unemployment

Question 31

recession

Answer 31

a less severe form of depression

Question 32

recovery or upswing

Answer 32

a period where economic growth begins to increase again after a recession

Question 33

The impact of the business cycle on business:

Answer 33

• Output (In a boom output increases and in a recession output will fall)
• Profit (during a boom profit is likely to increase because demand is rising and it is easier to rise prises)
• Business confidence and investment
• Employment
• Business start-ups and closures

Question 34

How might business respond to the different phases in the business cycle:

Answer 34

• During a boom most business owners will be full of confidence and probably looking for opportunities to expand their operations and increase their profitability.
• Once a boom is over, and economic growth slows down, businesses may become more cautious. Confidence may be lower and there will be less incentive to invest and expand.
• If the economy slides into a recession or depression, many business will lack confidence and may become anxious.
• Once an economy starts to recover from a recession, businesses and consumers start to feel more confident again.