6.1 Economic Issues Flashcards
Define Economy.
The economy is everything which is produced and consumed within a country.
What contributes to the economy?
Every action by businesses or individuals which involves a transaction
Define Gross Domestic Product (GDP).
a way of measuring the size of the economy or economic activity
How is GDP measured?
by adding up the value of all the goods and services produced in one country in one year.
Which countries countries are considered the GDP “giants”?
The United States and China
they contribute over 40% of the whole world’s GDP.
Explain the impact of high GDP.
Increased GDP leads to a positive spiral of greater consumer spending, increased production, and higher employment. Higher consumer spending means increased opportunities for higher sales and profits for businesses.
Explain the impact of decreasing GDP.
negative spiral of decreasing GDP, resulting in lower consumer spending, production and employment means tougher economic conditions for businesses.
Plot the business cycle in a graph.
Explain the growth phase.
In the growth phase, GDP is increasing so it’s a good time for businesses to expand. Unemployment decreases, so consumers have more money to spend.
Explain the “boom” phase.
In the boom phase there are high levels of consumption and lots of money flowing in the economy but also high costs, as prices rise and labour becomes more expensive.
________ is likely to take place in the boom phase.
Inflation
Define inflation.
when prices and salaries rise quickly so the value of money (what you can buy) decreases.
Define Recession.
when the economy is getting smaller.
Explain what happens during a recession.
It’s a tough time for businesses with less demand from consumers and higher unemployment.
Explain the slump.
a slump is when there is a long period of little movement in the economy. There is low demand from consumers so it’s not a good time for business. There are also high unemployment rates.
What is the government’s economic objectives?
to create continual sustainable growth, leading to higher GDP and high employment.
Governments also must keep inflation under control.
What happens if the government increases taxes?
increasing taxes will mean consumers have less money to spend, so businesses will find it more difficult to make sales.
What happens if the government decreases taxes?
If the government decreases taxes, consumers will have more money to spend and business should benefit.
What happens when interest rates increase?
if interest rates increase, consumers are more likely to save and less likely to spend. It also means businesses will have higher repayments on their debts. Businesses may choose to postpone a large capital investment or choose another source of finance, for example, equity finance rather than debt finance.
What is the impact of low interest rates on businesses?
businesses are more likely to invest in capital projects
What is the average worldwide government spending?
15%
What are the benefits of government spending?
A government may choose to invest in capital projects like infrastructure, schools, hospitals, roads or a 5G network. This could be great news if your business is in building or construction and secures a lucrative government contract.
Governments can also spend on welfare payments, to unemployed people or parents with young children. If governments give more money to their citizens it will mean higher consumer spending and business will benefit from higher sales
What happens if government spending is low?
It will generally mean tougher conditions for consumers and businesses.
Which products will experience low sales? When?
luxury products like expensive cars, fashion and holidays experience low sales usually when the economy is in a recession or slump
How can companies adapt during a recession/slump?
t by offering lower cost alternatives, so their customers continue to spend. This may mean lower profit margins, but in times of recession or reduced consumer spending, business objectives will change to survival and retaining market share.
Give an example where changing economic conditions has benefited a business.
During the 2009 economic crash Netflix increased its market share, by marketing itself as a low cost alternative to expensive cable TV packages.
