Chapter 27 - Economic Issues Flashcards
GDP
Gross Domestic product
Total value of output of goods and services in a country in a year, a way of measuring the size of the economy.
Main stages of the business cycle
Growth
Boom
Recession
Slump
Growth stage of the business cycle
Stage in which the GDP is rising, unemployment is falling, the country has higher living standards and businesses are doing well. The desired stage.
Boom stage of the business cycle
To be avoided as it triggers recession
Caused by too much spending, prices rise quickly and there are shortages of skilled workers. Business costs rise and concern is raised for future business activity
Recession stage of the business cycle
Caused by too little spending
Period when GDP falls and most businesses experience falling demands and profits. Unemployment rises
Inflation
Increase in the average price level of goods and services over time
Unemployment
Exists when people who are willing to work cannot find jobs
Economic growth
When a countries GDP increases, meaning more goods and services are produced than in the previous year
How do employment levels impact businesses (4)
It affects the ability to hire new employees, the higher the unemployment rates the more people to choose from.
Customers may have lost their jobs leading to a reduction in sales.
GDP falls
Less products are produced.
What can a business do when unemployment levels are rising
They can sell cheaper products, causing an increase in sales as customers will buy cheaper alternatives to cut back on costs
How often is GDP calculated
Every 3 months
How does inflation impact businesses
Costs increase, forcing them to increase their selling price which decreases their sales.(depending on the products they sell)
Essential products are more expensive leaving customers with less income available for non-essential products
How does a rise in GDP impact businesses
A rise in GDP means the economy is growing/recovering, resultung in more sales as people have jobs and therefore income to spend
It’s harder to recruit new employees as the unemployment rate is likely to fall
Exports
Goods and services sold from one country to other countries
Imports
Goods and services brought in by one country from other countries
Exchange rate
Price of one currency in terms of another
Exchange rate depreciation
Fall in value of a countries currency compared with other currencies
Government economic objectives (4)
Low inflation
Low unemployment
Economic growth
Balance of payments
Why is low inflation a government objective
This is when there is a low rise in average prices over time, which encourages businesses to expand and sell goods abroad.
Rapid inflation leads to changes in spending patterns and reduces real incomes, forcing people to buy foreign goods as they will be cheaper than those domestically produced causing a loss of jobs
It also prevents businesses from expanding, therefore no new jobs and a fall in living standards
Why is economic growth a government objective (4)
More workers are needed, reducing unemployment
Total level of output of goods + services increases
Businesses will be able to expand as they will have money to spend
Raises living standards
Why is low unemployment a government economic objective (3)
Unemployed people do not produce goods/services therefore they dont contribute to the GDP
Government has to pay unemployment benefit to the jobless, money which could be spent of important infrastructure
Improves workers living standards
Real income
Value of an income in terms of what can be bought with it
(Buying power)
Why is balance of payments an economic objective (3)
Governments want to avoid being in a payment defecit (imports>exports) as they want money coming into the country rather than leaving as it raises the GDP. They want a positive balance.
If the country is in a negative balance they could run out of foreign currency and need to borrow abroad
Exchange rates will fall leading to exhange rate depreciation resulting in less buying power.
Impact of changes in taxes for businesses
If taxes increase, Sales fall as consumers have less money to spend, the business should benefit if taxes are decreased
What is the impact of a change in interest rates
If they increase consumers are more likely to save instead of spend their money. There will be higher repayments on debts. Businesses may choose to postpone large capital investments or choose another source of finance. If interest rates are low businesses are more likely to invest in capital projects
Impact of changes in government spending
Governments may choose to invest in schools roads etc, which is great news if your business is in the constrution area and gets a government contract
Worldwide government spending average
15%
Government economic policies (3)
Fiscal policy
Monetary policy
Supply side policy
Monetary policy
Interest rates set by the government or central bank
Interest rates
Costs of borrowing money
Effects of higher interest rates (monetary policy)(3)
-leaves firms with variable interest paying a lot more money and lose some oppurtunity to expand
-Borrowing money and new investments are reduced, fewer factories and offices built. Entrepreneurs cant afford the capital needed and available income is reduced, leading to a reduction in demand for goods and services
-higher rates in 1 country encourages foreign banks + individuals to deposit their money there to earn the higher interest rates
Supply side policy
Government economic policy that tries to increase competitiveness of industries in an economy agains those from other countries. Policies to make the country more efficient and supply more goods + services.
Done through privatisation, improving training + education and increase competition in all industries
Fiscal policy
Government economic policy all about taxes and government taxes
Consists of direct and indirect taxes
Direct taxes and their effects
Profit/corporation tax - lower profits, less money to reinvest, limited expantion,
Share prices fall and less investors + entrepreneurs
Income tax- results in individuals having less disposable income and the % of income depends on your tax bracket
Indirect taxes/expenditure taxes and their effects
Taxes added to prices of goods (non essential) as they are purchased (VAT)
Prices rise, sales and demand fall (non-essential goods)
Prices rise, real income declines
Import tarrif
Tax placed on imported goods when they arrive into the country
Import quota
Restriction of the quantity off goods that can be imported
Import tarrifs and quotas effect
(Indirect tax)
Protects industries from foreign competition
Gives businesses the benefit of competing with imported goods
Higher costs to import raw materials+components
Retaliation as other countries also introduce import tarrifs leading to a loss of foreign sales
How should businesses respond to an increase in income tax and the problems with the responses (2)
Lower prices on existing products to increase demand - less profit made on each sale
Produce cheaperproducts for lower prices - possible damaged brand image
How should businesses respond to an increase in tarrifs on imports and the problems with the responses (2)
Focus on domestic products - may still be profitable to export
Buy locally produced components - foreign materials may be higher quality
How should businesses respond to an increase in government spending and the problems with the responses (2)
Switch marketing strategy to gain more public sector contacts (build hospitals equip schools) - a lot if competition if other businesses copy
How should businesses respond to an increase in income tax and the problems with the responses (3)
Reduce investments - other companies might not and you’ll lose market share
Develop cheaper products - poor brand image
Sell assets for cash to reduce loans - assets may be needed for future expantion
