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Business Studies GCSE Unit 6 Focus > Chapter 24: Economic Issues > Flashcards

Chapter 24: Economic Issues Flashcards

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1
Q

What is the economy?

A

The state of a country or region in terms of the production and consumption of goods and services and the supply of money.

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2
Q

What are the 4 economic objectives of a government?

A
  • Healthy balance of payments
  • Low unemployment
  • Low inflation
  • Economic growth
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3
Q

What are imports?

A

The goods and services bought by a country from other countries. (Money flowing out)

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4
Q

What are exports?

A

The goods and services sold by one country to other countries in return for foreign currency. (Money flowing in)

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5
Q

Notes on a positive balance of payments (Card 1)

A
  • The balance of payments of a country is positive when the value of exports is greater than the value of imports
  • If there are more imports than exports, there is more foreign currency flowing out than coming into a country
  • This is known as a balance of payments deficit, which can cause a shortage of foreign exchange
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6
Q

What is an exchange rate?

A

The value of one currency for the purpose of conversion to another.

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7
Q

Notes on a positive balance of payments (Card 2)

A
  • This means that the government of the country may have to borrow foreign currency from other countries at expensive rates of interest
  • This could also affect the exchange rate of the country
  • To avoid expensive borrowing costs and varying foreign exchange rates, it’s better for a country to have a positive balance of payments
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8
Q

What are the benefits of low inflation?

A
  • People enjoy a better standard of living
  • They can afford to pay for goods and services
  • They can afford to pay for non-essential (luxury) items
  • Easier for companies to set up new ventures and expand – so the economy benefits in all sectors
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9
Q

What are some problems with inflation increasing?

A
  • People may not be able to afford to buy local goods and instead may buy foreign goods (which may be cheaper)
  • Can affect local businesses in the country as they receive fewer sales
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10
Q

Why do governments want people to have as many jobs as possible? (Economic objectives)

A
  • People with jobs contribute to the total output of the country and improve economic growth (by increasing GDP)
  • They can earn money and have a better standard of living
  • Government doesn’t have to spend money on unemployment benefits so can spend that money on improving the country’s infrastructure
  • The higher the employment level, the more income tax a government receives
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11
Q

What is infrastructure?

A

The basic physical and organisational structures and facilities (e.g. buildings, roads, power supplies) needed for the operation of a society or enterprise.

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12
Q

What does GDP show?

A

Whether a country’s economy is growing or not.

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13
Q

What does it mean if GDP increases?

A
  • This is good for people as their standard of living should improve
  • A growing economy should mean more business opportunities
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14
Q

What does it mean if GDP decreases?

A
  • Bad for the economy and businesses and people in it
  • Could lead to lower output so fewer employees are needed
  • Generally people experience a lower standard of living as they can’t afford to buy as many goods and services
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15
Q

What are the 4 main stages of the business cycle?

A
  • Growth
  • Boom
  • Recession
  • Slump
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16
Q

What are key characteristics of the growth stage in the business cycle?

A
  • A positive outlook for new businesses
  • Existing businesses grow and make profits
  • Growth in economic activity is measured by a rise in GDP until it reaches a maximum (boom)
  • Falling unemployment as there are more jobs due to businesses doing well
  • Raised standards of living as more people are employed
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17
Q

What are key characteristics of the boom stage in the business cycle? (Card 1)

A
  • Business investments and profits are at their highest levels
  • Most sectors of the economy are performing at their best
  • High levels of demand for goods and services causing prices to rise (inflation)
  • Very low unemployment rates
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18
Q

What are key characteristics of the boom stage in the business cycle? (Card 2)

A
  • People have better jobs to choose from, leading to increased wage costs for businesses as well as a shortage of skilled people
  • Too much spending and high borrowing costs during this stage may be risky for businesses
  • If the economic outlook looks poor, the economy may go into a decline
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19
Q

What are key characteristics of the recession stage in the business cycle? (Card 1)

A
  • Economy shrinks in size
  • Business confidence falls leading to less investment in new and existing businesses
  • Decline in economic activity until it reaches a minimum (slump)
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20
Q

What are key characteristics of the recession stage in the business cycle? (Card 2)

A
  • Falling demand by consumers leads to falling profits
  • Unemployment rises as businesses aren’t doing well and have to cut costs
  • Employees are made redundant and businesses may close down
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21
Q

What are key characteristics of the slump stage in the business cycle? (Card 1)

A
  • When the economy is at its worst
  • Very low business confidence with very little investment in new and existing businesses
  • Low production of goods and services
22
Q

What are key characteristics of the slump stage in the business cycle? (Card 2)

A
  • Many businesses close down
  • Low demand for goods and services
  • High unemployment due to low business activity
23
Q

How do governments achieve these economic objectives?

A

By controlling:

  • Interest rates (monetary policy)
  • Tax rates (fiscal policies)
  • Government spending (fiscal policies)
24
Q

Where do governments mainly get their income from?

A

Taxes

25
Q

Why do governments want a steady growth in the economic activity of a country, not extremely fast or too slow?

A
  • If the growth is too fast, it may not be long-lasting as the infrastructure to support this growth may not exist
  • A slow growth rate will increase unemployment levels as there will be fewer jobs
  • In that situation, governments may change their economic (fiscal) policies to encourage growth
26
Q

What are the fiscal polices in government income?

A
  • Taxes
  • Borrowing e.g. from financial institutions
27
Q

What are the fiscal polices in government spending?

A
  • Public services, e.g. schools and hospitals
  • Subsidies on goods and services
  • Welfare benefits
28
Q

What is a subsidy?

A

A sum of money granted by the state or a public body to help an industry or business keep the price of a commodity or service low.

29
Q

What do governments spend taxes on?

A
  • Pay for investments they make in public services
  • E.g. education, health and transportation
30
Q

KEY WORD: Direct tax

A

The tax charged on personal income or tax on the profit made by a business.

31
Q

KEY WORD: Indirect tax

A

The tax charged on the price of goods and services, which is added to the price of goods and services before they are bought.

32
Q

What are the two main types of direct tax that can be paid by an individual or a business?

A
  • Income tax
  • Corporation tax
33
Q

What is income tax?

A
  • The amount of income tax charged depends on the amount of income.
  • The higher the income tax rate, the smaller the disposable income of individuals
  • If the economy is in recession, the government may decide to invest in certWhaain sectors in order to encourage growth
  • This investment may be partly funded by higher tax rates
34
Q

What is the effect on an increase in income tax rates on consumers?

A

A reduced disposable income so consumers spend less on goods and services.

35
Q

What is the effect on an increase in income tax rates on businesses?

A
  • Less demand for goods and services leading to fewer sales for businesses
  • Employees may not be motivated to work hard, affecting production
36
Q

What are a business’s responses to an increase in income tax rates?

A
  • Businesses focus on cost reduction so they can offer competitive pricing to attract customers
  • Firms reduce production levels because of fewer sales
  • Businesses may decide to provide more fringe benefits to compensate and improve motivation
37
Q

What is corporation tax?

A
  • Tax paid by businesses on the profits they make
  • The higher the corporation tax rate, the smaller the profit after tax available to businesses!
  • If a country’s in recession and the government’s objective is to encourage economic growth, it can lower the corporation tax rate
38
Q

What effect does an increase in corporation tax rate have on shareholders?

A

Shareholders will receive fewer dividends!

39
Q

What effect does an increase in corporation tax rate have on business?

A
  • Smaller profit after tax for businesses
  • A smaller amount to reinvest and grow
  • New shareholders will be discouraged from investing
40
Q

What are a business’s responses to an increase in income tax rates?

A
  • Businesses may rethink their growth strategy
  • May relocate their operations in a foreign country with a lower corporation tax rate
  • Smaller profit may lead businesses to increase prices to meet costs
  • They may have to look at other ways of obtaining funds
41
Q

What are examples of indirect taxes?

A
  • Value added tax (VAT)
  • Import tariffs/customs duty
  • Sales tax
  • Excise duty
42
Q

What is excise duty?

A

The tax paid by a manufacturer on the production of specific goods within the country.

43
Q

What is VAT added to?

A

The price of some goods and services we buy.

44
Q

Is VAT added to essential items?

A

No because VAT makes goods and services harder to buy.

45
Q

What is the effect of VAT and an increase in sales tax on consumers?

A
  • Goods and services become more expensive
  • Demand for related goods and services falls
46
Q

What is the effect of VAT and an increase in sales tax on businesses?

A

Businesses make fewer sales.

47
Q

What is the business response to an increase in VAT/sales tax?

A
  • Less production due to decreased demand
  • Businesses will have to become more competitive in price
48
Q

Notes on import tariffs/customs duty

A
  • Governments can raise money by charging import tariffs/customs duty on goods that are imported from other countries
  • Helps the government control the number of imports, so that local businesses don’t incur loss of sales (mmm)
  • Helps domestic companies grow and to protect them from foreign competition
  • Tax will discourage consumers from buying too many
  • Import tariffs may increase the costs of locals businesses that rely on imported raw materials
49
Q

How does an increase in import tariffs/customs duty affect consumers?

A

Imported goods or goods using imported raw materials become more expensive.

50
Q

How does an increase in import tariffs/customs duty affect businesses?

A
  • Lower sales for businesses selling imported goods
  • Increased cost of imported raw material may lead to higher cost of production (think about the chain effects)
  • Local firms may benefit as demand for their products will increase
51
Q

What is cost of production?

A

Costs of production refer to all the expenses incurred in the process of creating and delivering a product or service. These expenses can include raw materials, labour, equipment, rent, and marketing costs. In simple terms, it is the sum of all expenses necessary to produce and sell a product or service.

Business Studies GCSE Unit 6 Focus (7 decks)

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