7.5 Economic change (Analysing external position)

Question 1

Gross domestic product (GDP)

Answer 1

A measurement of growth (of the economy).
Economic activity is measured by GDP.
Total value of a country’s output in a year.

Question 2

Real GDP

Answer 2

Takes into account inflation.
GDP- Inflation = Real GDP

Question 3

Fluctuations in GDP

Answer 3

Affects businesses and consumer confidence, and ability & willingness to spend.

Question 4

Consumer price index

Answer 4

Typical basket of goods- how much of an item is sold in 3 months, then another time etc…

Question 5

4 main stages to a business cycle

Answer 5

Boom, Recession, Slump, Recovery.

Question 6

What does business cycle show?

Answer 6

Fluctuations in GDP over period of time.
Trend rate line (dotted) represents steady rate of economic growth over period of time.

Question 7

GDP ABOVE the trend rate line

Answer 7

Represents positive economic growth.

Question 8

GDP BELOW trend rate line

Answer 8

Represents negative economic growth.

Question 9

1) BOOM

Answer 9

-economy is at strongest
-demand high, businesses doing well
-GDP is high
-high production
-employment high
-increased investment & business confidence
HOWEVER:
-inflationary pressure and price rises- inflation goes up.
-businesses struggle to meet capacity and demand.

Question 10

2) RECESSION

Answer 10

-2 consecutive quarters (6 months) of NEGATIVE economic growth.
-Inflation continues to rise
-Businesses struggle to meet demand
-costs of production increase
-businesses begin to lose profits, confidence reduces
-demand falls due to inflation going up, redundancies happen, cut capacity, reducing amount produced.
-unemployment rises, business investment plummets.
-government lowers interest rates to give people more disposable income, reduce borrowing costs to stimulate demand.

Question 11

3) SLUMP

Answer 11

Does not always follow a recession!
-it is a protracted recession (over long period of time)
-very high levels of unemployment
-very low levels of consumer spending and business confidence
-large scale redundancies
-increased number of liquidations and bankruptcies
-government increases welfare spending, lower interest rates further
-businesses struggle to survive, many close.

Question 12

4) RECOVERY

Answer 12

-increase in consumer spending
-as production begins to rise existing spare capacity is used
-business confidence strengthens, investment rises slowly
-prices may begin to increase slowly

Question 13

Taxation

Answer 13

Taxes are financial levies (payments we have to pay) or payments on a variety of business activities.

Question 14

Income Tax

Answer 14

Most important to government in relation to tax yield: amount of tax they get.
Paid by ALL tax payers earning over certain amount annually.
Paid by workers based on their income.
Paid by sole traders & partnerships based on operating profit.

Question 15

National Insurance Payments

Answer 15

Contributions made towards cost of certain state benefits. e.g Pensions.
Deducted from workers wages and salaries as well as contribution from employer.

Question 16

Value Added Tax (VAT)

Answer 16

Levied on spending at current rate of 20%.
Some items have lower VAT or no VAT at all.
low VAT item: childrens car seats.

Question 17

Corporation Tax

Answer 17

Paid by companies in the UK on their profits.
Government in UK committed to creating environment attracting foreign businesses, therefore has competitive rate of 25%.

Question 18

Customs & Excise Duty

Answer 18

Customs duties are paid on imported products.
Excise duty is a tax on production of certain products in UK such as petrol, gambling etc..
Designed to raise additional revenue and encourage consumers & businesses to increase consumption of less harmful products.

Question 19

Changes in taxation and business decisions:

Answer 19

Most businesses wish to maximise profits, often look for ways to use specialist tax lawyers to minimise tax liability.
-some businesses relocate countries where tax liability is less.
-VAT is viewed as unfair and regressive as everyone pays same irrespective of income & wealth.

Question 20

Inflation

Answer 20

General rise in prices or fall in value of money.
Shows how prices have changed based on same period a year earlier.
-Indication of cost of living changing.

Question 21

2 measurements of inflation

Answer 21

Retail Price Index (RPI)
Consumer Price Index

Question 22

Retail price index

Answer 22

A measurement of a ‘basket’ of goods & services representative of what people buy in UK.

Question 23

Consumer price index

Answer 23

Similar to retail price index but mainly excluding housing costs.

Question 24

Low rates of inflation indicates

Answer 24

Economy is growing.

Question 25

Inflation becomes a problem when…

Answer 25

inflation increases more than incomes, consumers are less well off, demand decreases.

Question 26

Business negative responses to inflation

Answer 26

-falling sales, consumers have less disposable income
-may reduce production levels or target other markets where inflation more stable
-costs of production increase as price of raw materials, fuel and wages increase

Question 27

Positive response to inflation

Answer 27

Low, stable rates of inflation (prices rising steadily) is good for businesses- indicates economic growth, encourages investment.

Question 28

DEflation

Answer 28

Countries prices are falling, value of money increasing.
-Short term; if prices fall, provides temporary boost for economy as consumer spending increases.
-If deflation persists, reflects economic decline as profits decrease as well as investment.

Question 29

Exchange rates

Answer 29

Price of one currency in terms of another.

Question 30

Appreciation

Answer 30

Increase in value of a currency.
Means currency is worth MORE.

Question 31

Depreciation

Answer 31

Decrease in value of money.
Means currency is worth LESS.

Question 32

Why do businesses buy foreign currencies?

Answer 32

-To pay for goods and services from overseas.
-Businesses purchasing from abroad expected to pay using currency of exporting country.
-Demand for foreign currencies may also arise as individuals + businesses will wish to invest in foreign companies.

Question 33

Reasons exchange rate changes impact a business

Answer 33

1) Value of the change: how much it is appreciated/depreciated by.
2) Whether business is importing or exporting business.

Question 34

SPICED

Answer 34

Strong pound imports cheaper, exports dearer.
-Businesses that import able to buy cheaper raw materials and finished goods.
-Businesses that export may see less demand.

Question 35

WPIDEC

Answer 35

Weak pound imports dearer, exports cheaper.
-Greater demand from abroad for UK goods.
-Prices will increase if raw materials are imported
-If price inelastic product, able to pass increase costs onto consumer.

Question 36

Fluctuations

Answer 36

Fluctuations create uncertainties, prices will change regularly if a business trades with foreign businesses.

Question 37

Impacts of fluctuations

Answer 37

Impacts competitiveness of business:
-Costs and revenues increasing or decreasing.
-Profitability of business affected favourably or adversely.