Chapter 27 - Economic Issues

Question 1

GDP

Answer 1

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.

Question 2

Main stages of the business cycle

Answer 2

Growth
Boom
Recession
Slump

Question 3

Growth stage of the business cycle

Answer 3

Stage in which the GDP is rising, unemployment is falling, the country has higher living standards and businesses are doing well. The desired stage.

Question 4

Boom stage of the business cycle

Answer 4

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

Question 5

Recession stage of the business cycle

Answer 5

Caused by too little spending
Period when GDP falls and most businesses experience falling demands and profits. Unemployment rises

Question 6

Inflation

Answer 6

Increase in the average price level of goods and services over time

Question 7

Unemployment

Answer 7

Exists when people who are willing to work cannot find jobs

Question 8

Economic growth

Answer 8

When a countries GDP increases, meaning more goods and services are produced than in the previous year

Question 9

How do employment levels impact businesses (4)

Answer 9

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.

Question 10

What can a business do when unemployment levels are rising

Answer 10

They can sell cheaper products, causing an increase in sales as customers will buy cheaper alternatives to cut back on costs

Question 11

How often is GDP calculated

Answer 11

Every 3 months

Question 12

How does inflation impact businesses

Answer 12

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

Question 13

How does a rise in GDP impact businesses

Answer 13

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

Question 14

Exports

Answer 14

Goods and services sold from one country to other countries

Question 15

Imports

Answer 15

Goods and services brought in by one country from other countries

Question 16

Exchange rate

Answer 16

Price of one currency in terms of another

Question 17

Exchange rate depreciation

Answer 17

Fall in value of a countries currency compared with other currencies

Question 18

Government economic objectives (4)

Answer 18

Low inflation
Low unemployment
Economic growth
Balance of payments

Question 19

Why is low inflation a government objective

Answer 19

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

Question 20

Why is economic growth a government objective (4)

Answer 20

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

Question 21

Why is low unemployment a government economic objective (3)

Answer 21

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

Question 22

Real income

Answer 22

Value of an income in terms of what can be bought with it
(Buying power)

Question 23

Why is balance of payments an economic objective (3)

Answer 23

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.

Question 24

Impact of changes in taxes for businesses

Answer 24

If taxes increase, Sales fall as consumers have less money to spend, the business should benefit if taxes are decreased

Question 25

What is the impact of a change in interest rates

Answer 25

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

Question 26

Impact of changes in government spending

Answer 26

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

Question 27

Worldwide government spending average

Answer 27

15%

Question 28

Government economic policies (3)

Answer 28

Fiscal policy
Monetary policy
Supply side policy

Question 29

Monetary policy

Answer 29

Interest rates set by the government or central bank

Question 30

Interest rates

Answer 30

Costs of borrowing money

Question 31

Effects of higher interest rates (monetary policy)(3)

Answer 31

-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

Question 32

Supply side policy

Answer 32

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

Question 33

Fiscal policy

Answer 33

Government economic policy all about taxes and government taxes
Consists of direct and indirect taxes

Question 34

Direct taxes and their effects

Answer 34

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

Question 35

Indirect taxes/expenditure taxes and their effects

Answer 35

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

Question 36

Import tarrif

Answer 36

Tax placed on imported goods when they arrive into the country

Question 37

Import quota

Answer 37

Restriction of the quantity off goods that can be imported

Question 38

Import tarrifs and quotas effect

Answer 38

(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

Question 39

How should businesses respond to an increase in income tax and the problems with the responses (2)

Answer 39

Lower prices on existing products to increase demand - less profit made on each sale
Produce cheaperproducts for lower prices - possible damaged brand image

Question 40

How should businesses respond to an increase in tarrifs on imports and the problems with the responses (2)

Answer 40

Focus on domestic products - may still be profitable to export
Buy locally produced components - foreign materials may be higher quality

Question 41

How should businesses respond to an increase in government spending and the problems with the responses (2)

Answer 41

Switch marketing strategy to gain more public sector contacts (build hospitals equip schools) - a lot if competition if other businesses copy

Question 42

How should businesses respond to an increase in income tax and the problems with the responses (3)

Answer 42

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