Brainscape's Knowledge GenomeTM

Browse over 1 million classes created by top students, professors, publishers, and experts.


See full index

Business A level (Year2) > 7b Analysing the external environment: economic change (economy & economic policies) > Flashcards

7b Analysing the external environment: economic change (economy & economic policies) Flashcards

1
Q

What are the different economic forces which might impact upon decision making?

A
  • GDP
  • Inflation
  • Interest Rates
  • Exchange Rates
  • Monetary Policy
  • Fiscal Policy
  • Taxation
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
2
Q

What is a countrys GDP?

A

The value of a countrys output over a period of time is measured by its GDP.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
3
Q

What is a recession?

A

A period of atleast 6 months (or two quarters) during which an economy’s GDP falls.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
4
Q

What does the business cycle describe?

A

The regular fluctuations in economic activity (and thus GDP) that occur over time in all economies.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
5
Q

Business cycles generally have what 4 stages?

A

Recovery/ upswing

Boom

Recession

Slump

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
6
Q

What are the key features of recovery/ upswing?

A

Increasing consumer expenditure

Existing spare capacity used.

Production rises.

Business confidence strengthens

Investment increases.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
7
Q

What are examples of possible strategic & function decisions made in response to recovery/upswing?

A

Strategic decisions:

  • Entrepreneurs decide to start a new business.
  • Existing firms increase capacity.

Functional decisions:

  • Prices are increased.
  • Businesses operate nearer to (or at) full capacity.
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
8
Q

What are the key features of a Boom?

A
  • Rate of inflation normally increases.
  • Bottlenecks in supply of materials & components.
  • Some firms unable to satisfy demand.
  • Profits probably high-but hit by rising costs.
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
9
Q

What are examples of possible functional and strategic decisions made by businesses in response to a Boom?

A

Strategic decisions:

  • Firms enter new geographical markets.

Functional decisions:

  • Firms sub-contract production to other producers.
  • Businesses increase prices to dampen demand.
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
10
Q

What are some key features of a recession?

A
  • Government reduces interest rates.
  • Firms reduce production as demand falls.
  • Spare capacity increases.
  • Business confidence declines & investment is cut.
  • Profits fall.
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
11
Q

What are the possible strategic & function decisions taken in response to a Recession?

A

Strategic decisions:

  • Financially weak businesses may decide to stop trading.
  • Firms may enter overseas markets where demand is stronger.

Functional decisions:

  • Businesses stockpile products.
  • Workers required to work short-time.
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
12
Q

What are the key features of a slump?

A
  • Increasing number of bankruptcies & insolvencies.
  • Government lowers interest rates further.
  • High levels of unemployment.
  • Low levels of business confidence & consumer spending.
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
13
Q

What are the possible strategic & function decisions taken in response to a slump?

A

Strategic decisions:

  • Large-scale redundancies may be announced.
  • Factories, offices and stores closed to reduce capacity.

Functional decisions:

  • Businesses offer basic products at low prices.
  • Promotion focuses on price & easy payment terms.
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
14
Q

Recovery/ upswing

What happens in this period?

A
  • As the economy recovers from a slump, production & employment both begin to increase.
  • Consumers will generally spend more- as more confident in job security.
  • Initially businesses may respond cautiously through functional decisions to meet rising demand by using spare capacity.
  • As confidence begins to increase, firms may invest in new non-current assets e.g. factories, machinery, vehicles.
  • Employees experience less difficulty in finding jobs & wages may begin to rise.
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
15
Q

Boom

What happens in this stage?

A
  • Boom follows with high levels of production & expenditure by firms, consumers & gov.
  • Prosperity & confidence in business & invest in non-current assets.
  • Many sectors of the economy will experience pressure- skilled workers may become scarce & firms competing for workers may offer higher wages.
  • As economy approached max production, shortages & bottlenecks will occur as insufficient raw materials & components exist to meet demand.
  • Will result in prices rising.
  • Rising wages & rising prices of raw materials & components will create inflation- which usually lead to end of boom.
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
16
Q

Recession

What happens in this stage?

A
  • Occurs when incomes & output start to fall& do so continuously for at least 6 months.
  • Rising prices of labour & materials mean businesses face increased costs of production- beginning to reduce profits.
  • In these circumstances- gov has reduced interest rates to avoid GDP falling further.
  • Falling demand from consumers & profits- likely to lead to any plans of investment- new factories being delayed/ abandoned.
  • Amount of spare capacity within economy will rise- some businesses will fail & level of bankruptcies is likely to increase.
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
17
Q

Slump

What happens within this stage?

A
  • Slump may follow a recession.
  • An economy may enter the upswing stage of of the business cycle without moving through a slump period.
  • Governments may take action to encourage this through fiscal & monetray policy- e.g. increasing their own spending & lowering interest rates.
  • Slump -sees production at its lowest while unemploment is high.
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
18
Q

The effects of changes in GDP

What will happen to firms selling products whose demand is sensitive to income- e.g. designer clothes/ foreign holidays during a boom & recession?

A

Boom- sales may strongly rise.

Recession- forms may heavily fall.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
19
Q

The effects of changes in GDP

What will happen to businesses selling staple products such as foodstuffs?

A

As demand isnt elastic, they may be relatively unaffected by changes in the level of GDP!

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
20
Q

What is an exchange rate?

A

The price/value of one currnecy expressed in terms of another.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
21
Q

Exchange rates can cause uncertainty for businesses for what reasons?

A

Uncertainty over revenue.

Uncertainty regarding quantities likely to be sold.

Uncertainty regarding competitors responses.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
22
Q

What techniques can the undesirable effects of exchange rates be reduced through?

What are the disadvantages of this however?

A
  • Forward foreign currency markets.
  • This sets a guaranteed exchange rate at some future date - meaning that the amount received from overseas trading is more certain.

HOWEVER

  • Fixing an exchange rate does not guarantee a particular level of sales & the bank arranging this service may require a fee.
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
23
Q

Decision making & exchange rates

What is an alternative way than fixing an exchange rate that companies such as Toyota use?

What will the impact of this be?

A
  • To require suppliers to price their products in a different currency.
  • As a result, fluctuations in the exchange rate will have less impact on the company as it pays suppliers in the same currency that it receives from European customers.
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
24
Q

What markets are exchange rate changes more of a problem & what may these businesses do in response?

A
  • Markets where fierce price competition occurs.
  • In these circumstances- demand is more price elastic & businesses under pressure to respond quickly to any change in exchange rate.
  • This may lead to strategic decisions to minimise these effects- e.g. seek to create productive capacity in overseas markets to avoid the effects of changing currency values.
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
25
Q

What is inflation?

A

A persistent rise in the price level & the associated fall in the value of money.

26
Q

What is deflation?

What impact does this have on the economy?

A
  • Describes the situation in which a country’s prices are falling, meaning that the value of money is increasing.
  • It is a situation in which an economy suffers from negative rates of inflation.
27
Q

What is the CPI?

A

Consumer Price Index

Measures the rate of inflation based on the changes in prices of a basket of goods & services.

28
Q

How do we measure the rate of inflation in the UK?

A

Consumer Price Index

29
Q

How does the CPI work?

A

Was introduced in 2003 & measures the average monthly change in prices of goods & services purchased by households in the UK & the gov will use to set targets for inflation in the future.

30
Q

How can inflation encourage long term borrowing & investment in non-current assets?

What is the target rate of inflation per annum?

A

As the value of their repayments (in real terms) declines over time.

2%

31
Q

What is income tax?

A
  • Most important tax to the UK government in terms of tax yeild & is paid by all UK taxpayers earning over a certain amount anually.
  • Paid by employees on their wages & salaries & by sole traders or partners on the profits made by their business.
32
Q

What is VAT?

A

Value added tax

This is a tax levied on spending. Most goods & services sold in the UK have a VAT rate of 20% added to their price.

33
Q

What are National Insurance payments?

A

Contributions made towards the cost of certain state benefits such as pensions.

They are paid by both employers & employees!

34
Q

What is Corporation tax?

A

Paid by companies in the UK on their profits.

The UK gov is committed to creating a very competitive tax regime for corporation tax in the expectation of attracting international businesses to the UL.

35
Q

What are customs & excise duties?

A
  • Customs duties are paid on some imported products.
  • Excise duty is a tax on the production of certain products in the UK including tobacco, petrol, alcohol & gambling.
  • Demand for these products is often price inelastic.
36
Q

Changes in taxation & business decision making

What is it common for some businesses to do to minimise tax liabilities?

A

Use specialist taxation lawyers to help to devise ways of minimising tax liabilities while remaining within the law-although is a controversial topic!

37
Q

How can taxation rates influence businesses strategic decisions- what is an example?

A

May relocate!

38
Q

What are two negative effects that occured due to the UK gov increasing the rate of VAT from 17.5% to 20%?

A
  • Increased costs for many businesses as they paid a higher amount of tax on many inputs used in production. They can pass this on in the final price paid by consumers or other businesses- however not always possible in a competitive market!
  • Consumers faced paying higher prices for many products- reducing overall demand for goods & services.
39
Q

The government persues a number of macroeconomic objectives- which are the most important?

A
  • Steady annual increases in real GDP of around 2-3% each year.
  • Inflation at an annual rate of 2%.
  • A low & stable rate of unemployment.
  • A balanced balance of payments on current account (a financial record of the UKs trading & some financial transactions with the rest of the world.
40
Q

What are the governments 3 main policies used to manage the economy in pursuit of its macroeconomic policies?

A

Fiscal policy.

Monetary policy.

Supply-side policies.

41
Q

What is the budget balance?

A

The difference between government spending & revenue over the financial year.

42
Q

What is Fiscal policy?

A

The use of taxation & public expenditure to manage the level of economic activity.

43
Q

What is monetary policy?

A

Controlling the amount of money and/ or interest rates within the economy in order to achieve the desired level of economic activity.

44
Q

What are the two types of fiscal policy the government can operate?

A
  • Expansionary fiscal policy- Entails cutting taxation and/or increasing government expenditure on items such as health, education, social services, defence & transport.
  • Contractionary fiscal policy- reducing gov expenditure or increasing taxation- or by both policies. The effect is to reduce the govs budget deficit or to increase the surplus on its budget for the fiscal year.
45
Q

What is PSNCR?

A

Public sector net cash requirement.

The amount by which the public sector’s revenues fall short of its expenditure.

46
Q

The effects of the government’s taxation & expenditure policies

Expansionary fiscal policy

  • What does it aim to achieve?
  • How is it achieved?
  • What are the results?
A
  • To increase the level of economic activity.

THROUGH

  • Cutting rates of taxation and/ or increasing government expenditure.

RESULTS IN

  • Increased output & spending
  • Less unemployment but possible increase in inflationary pressure & more imports.
47
Q

The effects of the government’s taxation & expenditure policies

Contractionary fiscal policy

  • What does it aim to do?
  • How is this achieved?
  • What does it result in?
A

Aim to?

  • Reduce the level of economic activity

HOW?

  • Through increasing rates of taxation and/ or cutting government expenditure

Results in?

  • Lowered output, spending & employment; may curb inflationary pressure & spending on imports.
48
Q

What are direct taxes?

A

Taxes on incomes & profits & include income tax and corporation tax.

49
Q

What are indirect taxes?

A

VAT and other taxes on spending

50
Q

What are interest rates?

A

The price of borrowed money

51
Q

Monetary policy can make use of what?

A
  • Altering interest rates.
  • Controlling the money supply.
  • Manipulating the exchange rate.
  • The use of quantitative easing & forward guidance.
52
Q

What are the likely objectives of rising interest rates?

A
  • Reducing the level of consumer spending in the economy.
  • Limiting inflationary pressure in the economy.
  • Slowing the level of economic growth.
  • Avoiding increasing imports creating a deficit in the balance of payments.
53
Q

What are the likely objectives of falling interest rates?

A
  • Reducing levels of unemployment.
  • Stimulating the level of production and thus GDP in the economy.
  • Promoting export sales by reducing the exchange rate of the pound.
  • Increasing rates of economic growth in the economy

(can assist the economy in recovering from a slump)

54
Q

What are the possible consequences for business with rising interest rates?

A
  • Many may experience falling sales as consumers increase savings & businesses reduce production.
  • Businesses may cancel/ defer investment plans.
  • Firms may seek to lower costs by reducing borrowing.
  • The pound sterling may rise in value (pushing up export prices) dissuading businesses from entering or expanding in overseas markets.
55
Q

What are the possible consequences for businesses with falling interest rates?

A
  • Demand & sales - likely to increase, especially for products bought on credit, prompting managers to expand production, possibly by using capacity more intensively.
  • Export sales of products in price elastic demand may rise as the exchange rate of the pound declines whilst imports become less competitive.
  • Businesses may undertake increased investment promoting growth in industries such as construction.
56
Q

What is free trade?

A

The unrestricted purchase & sale of goods & services between countries

57
Q

What is protectionism?

A

Where constraints are used to restrict the purchase & sale of goods & services between countries.

58
Q

What are some examples of protectionist policies?

A

Tariffs

Quotas

Non-tarrif barriers

59
Q

What are tariffs?

A

Taxes on imported goods that increase the price- thereby making the import less competitive.

60
Q

What are quotas?

A

Physical restrictions on the number of good imported into a country.

61
Q

What are non-tariff barriers?

A

Might inlclude excessive rules & regulations that make importing difficult, & extracting standards or specifications designed to make the cpost for the exporting nation excessive.

62
Q

What are the arguments for the introduction of protectionist policies?

A

The protection of domestic industries & employment, as well as the prevention of ‘dumping’.

This is when a country exports or sells products in a foriegn country for less than either the price in the domesyic country or the cost of making the products.

Business A level (Year2) (29 decks)

Brainscape helps you reach your goals faster, through stronger study habits.
© 2024 Bold Learning Solutions. Terms and Conditions