7.5 Economic change (Analysing external position) Flashcards
Gross domestic product (GDP)
A measurement of growth (of the economy).
Economic activity is measured by GDP.
Total value of a country’s output in a year.
Real GDP
Takes into account inflation.
GDP- Inflation = Real GDP
Fluctuations in GDP
Affects businesses and consumer confidence, and ability & willingness to spend.
Consumer price index
Typical basket of goods- how much of an item is sold in 3 months, then another time etc…
4 main stages to a business cycle
Boom, Recession, Slump, Recovery.
What does business cycle show?
Fluctuations in GDP over period of time.
Trend rate line (dotted) represents steady rate of economic growth over period of time.
GDP ABOVE the trend rate line
Represents positive economic growth.
GDP BELOW trend rate line
Represents negative economic growth.
1) BOOM
-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.
2) RECESSION
-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.
3) SLUMP
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.
4) RECOVERY
-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
Taxation
Taxes are financial levies (payments we have to pay) or payments on a variety of business activities.
Income Tax
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.
National Insurance Payments
Contributions made towards cost of certain state benefits. e.g Pensions.
Deducted from workers wages and salaries as well as contribution from employer.
Value Added Tax (VAT)
Levied on spending at current rate of 20%.
Some items have lower VAT or no VAT at all.
low VAT item: childrens car seats.
Corporation Tax
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%.
Customs & Excise Duty
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.
Changes in taxation and business decisions:
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.
Inflation
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.
2 measurements of inflation
Retail Price Index (RPI)
Consumer Price Index
Retail price index
A measurement of a ‘basket’ of goods & services representative of what people buy in UK.
Consumer price index
Similar to retail price index but mainly excluding housing costs.
Low rates of inflation indicates
Economy is growing.
Inflation becomes a problem when…
inflation increases more than incomes, consumers are less well off, demand decreases.
Business negative responses to inflation
-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
Positive response to inflation
Low, stable rates of inflation (prices rising steadily) is good for businesses- indicates economic growth, encourages investment.
DEflation
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.
Exchange rates
Price of one currency in terms of another.
Appreciation
Increase in value of a currency.
Means currency is worth MORE.
Depreciation
Decrease in value of money.
Means currency is worth LESS.
Why do businesses buy foreign currencies?
-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.
Reasons exchange rate changes impact a business
1) Value of the change: how much it is appreciated/depreciated by.
2) Whether business is importing or exporting business.
SPICED
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.
WPIDEC
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.
Fluctuations
Fluctuations create uncertainties, prices will change regularly if a business trades with foreign businesses.
Impacts of fluctuations
Impacts competitiveness of business:
-Costs and revenues increasing or decreasing.
-Profitability of business affected favourably or adversely.
