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A2 Business > CHAPTER 5- economic change > Flashcards

CHAPTER 5- economic change Flashcards

1
Q

what is gdp?

A

Gross domestic product is the measure of economic activity, the definition of a countries output over a given period of time

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2
Q

what is the business cycle?

A

The regular pattern of ups and downs in demand of output within an economy or gdp over time

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3
Q

what are the four main phases of the business cycle?

A

-Boom
Recession/downturn
Slump
Recovery/upturn

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4
Q

what are the possible causes of changes to the business cycle?

A
  • changes in business confidence eg. confidence in more sales will mean it will purchase more fixed assets to produce more meaning a large increase in orders for the producers of fixed assets
  • Irregular patterns of expenditure of consumers
  • confidence in the banking sector
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5
Q

what are the characteristics of a boom?

A 
high levels of consumer demand
high levels of business confidence
high levels of profit and investments at the same time as rising costs
increasing prices
full capacity
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6
Q

What are the characteristics of a recession?

A

falling levels of consumer demand, output, profit and business confidence.
little investment
spare capacity
rising levels of unemployment

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7
Q

What are the characteristics of a slump

A

very low levels of consumer demand, investment and business confidence
increase in failing businesses
high unemployment

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8
Q

What are the characteristics of a recovery

A

rising levels of consumer demand, rising investment, patchy but increasing business confidence and falling levels of unemployment.

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9
Q

what is macroeconomics?

A

total level of spending in the economy, the total level of production in the economy, national employment and unemployment levels, general level of prices, interest rates and exchange rates

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10
Q

what does growth in gdp usually mean?

A

higher standard of living because production allows incomes to rise which allows for more things to be bought

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11
Q

what determines how much a business is affected by a change in the business cycle?

A

the income elasticity of demand for the product eg. holiday companies will suffer if there is a recession because holidays are expensive and people dont have the money for them

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12
Q

what are the effects on a business of a boom?

A
  • demand is greater than supply so increase in prices
  • shortage of resources will lead to costs rising eg. wages in order to keep skilled workers. this can also increase prices
  • full capacity utilization so firms may consider outsourcing or expansion plans
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13
Q

what are the effects on a business of a recesssion?

A
  • Falling demand and therefore excess stock may lead to reduced prices
  • business closures as a result of falling demand, may result in fewer supplies of certain products
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14
Q

what are the effects on a business of a slump?

A
  • The lack of demand means firms are content to charge low prices, concentrating on sales volume rather than sales revenue
  • large scale unemployment because of low level demand so people are not needed
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15
Q

what are the effects on a business of a recovery

A
  • increased demand for goods may lead to increased profits
  • more investments in fixed assets and borrowing due to increased fixed assets
  • spare capacity used
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16
Q

why is business confidence good?

A

a optimistic outlook leads to higher levels of investments and stock building which causes the economy to grow

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17
Q

why dod governments try to describe the economy as positively as possible?

A

so that business confidence will increase

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18
Q

`what influences the level of economic growth?

A
  • natural resources- short term gain
  • well educated and highly skilled labour force- improves productivity
  • increasing investment and new tech
  • government policy can influence any of the above
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19
Q

what is a free exchange rate?

A
  • the exchange rate is determined by the demand and supply of the currency
  • if demand is high price goes up but if supply is too much price falls
  • demand comes from those who wish to buy uk goods and services
  • the supply of uk pounds comes from whose you need foreign currency in order to purchase foreign goods
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20
Q

what is a fixed exchange rate?

A
  • when a government decides to fix the value of its currency permanently in the relation to other currencies eg. the euro
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21
Q

what are the causes of an increase in exchange rates?

A
  • Increase in exports which increases the demand for the currency
  • A reduction in imports which decreases the supply of the currency
  • High interest rates which increase savings from abroad which increase demand for the currency
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22
Q

what is the effect of a change in the exchange rate on the price and the competitiveness of a exporter?

A

-A rise in the value of the pound leads to a less competitive export price while a fall in the value of the pound leads to a more competitive export price.

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23
Q

who sets the inflation target in the UK and what is it set at currently?

A

The Exchequer and it s currently at 2%

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24
Q

how is the inflation target kept at 2%?

A

the monetary policy committee is required to set interest rates to keep it there

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25
Q

What is real income?

A

What you can buy with your income

26
Q

who can inflation affect real income?

A

if prices rise by 2% then your real income has reduced by 2%

27
Q

what are the three causes of inflation?

A

Cost-push inflation
Demand pull inflation
inflationary expectations

28
Q

what is cost push inflation?

A

The increase in cost of production which forces firms to increase prices

29
Q

what is demand pull inflation?

A

when the demand in the economy increases without a corresponding increase in supply so prices increase

30
Q

what is inflationary expectations?

A

people expect a rise in inflation so ask their employers for a pay rise, this rise in costs for the firm then leads to a increase in prices

31
Q

what is hyperinflation?

A

when the value of money decreases so rapidly that people lose confidence in it so will try to barter with commodities eg.gold because of its own intrinsic value

32
Q

what is the positives of inflation on business and decision making

A
  • if inflation rates are lower than inflation then it will encourage borrowing, inflation reduces the real value of the the amount they owe making it easier to repay at the end of its life
  • as inflation rises then so do property prices so more profit can be made when so sell it
33
Q

what are the negatives of inflation on business and decision making

A
  • Higher prices may mean lower sales depending on the price elasticity of the product
  • Employees will want a pay rise because their real income will fall otherwise
  • costs go upppp
34
Q

what are the impacts of a low inflation rate for a business?

A

Interest rates are going to be low if inflation is low which will benefit most businesses. However low interest rates may cause the exchange rate to fall

  • Businesses are able to plan ahead because prices can be predicted more easily
  • More certainty about short term pricing decisions so more time to think about long time strategic decesion making
35
Q

what is the impact of deflation?

A
  • Prices fall

- Spending falls so the economy starts to shrink = businesses shrink = unemployment rises = people have less money

36
Q

what is is the role of fiscal and monetary policy in general?

A

to increase demand in the economy as a whole

37
Q

what is fiscal policy

A

the use of taxation and government expenditure to influence the economy

38
Q

what is monetary policy?

A

controlling the money supply and the rate of interest in order to influence the level of spending and demand in the economy

39
Q

what are the ways in which the government can raise tax to influence spending and demand

A

direct taxation

Indirect taxation

40
Q

what is direct taxation?

A

taxation on incomes and profits, individual earning over a certain income level pay income tax

41
Q

what is indirect tax?

A

tax on spending, VAT- 20% tax is charged on all goods and services

42
Q

what is the name of the separate tax charged on petrol, alcohol and cigarettes?

A

exercise duty

43
Q

what is government expenditure?

A

when the government spends money to increase spending eg. if they build a hospital to increase employment then more people will have money to spend

44
Q

what is the result of a governmental budget surplus?

A

taxation is higher than government spending therefore overall spending and demand will be reduced so there will be a fall in economic activity

45
Q

what is the opposite of a budget surplus?

A

budget deficit

46
Q

what do lower interest rates encourage people to do?

A

spend

47
Q

what do high interest rates encourage people to do?

A

save

48
Q

what is quantitative easing?

A

when the bank creates new money and uses it to buy bonds from banks. This means that banks are more willing to lend more money so individuals and businesses can spend more increasing growth

49
Q

what are the ways in which economic growth can be encouraged

A

lowering interest rates, introducing QE, government spending and reducing taxation

50
Q

what is an example of an area of free trade?

A

the EU, ASEAN, AFTZ, NAFTA, SAFTA

51
Q

what does a free trade area mean?

A

countries inside it don’t have to pay tariffs of exports and imports when trading with each other therefore resulting in lower prices for consumers

52
Q

what are the different types of protectionist measures againest trade?

A

Tariffs
Quotas
Non tariff barriers
Embargoes

53
Q

what is a Quota?

A

a restriction of a certain number of products in a country

54
Q

what are non tariff barriers?

A

subtle controls that are imposed by governments eg. constantly changing regulation which make compliance difficult for importers

55
Q

what is an embargo?

A

An order forbidding trade with a particular country

56
Q

what does the decision of open trade and protectionism impact on for businesses?

A
  • whether it sells products domestically or internationally
  • whether it uses imported raw materials in its production
  • whether it encounters competition
  • where its production bases are located
57
Q

what are some of the reasons for greater globalization of business?

A
  • growth of free trade trades meaning reduced barriers to international trade
  • protectionist measures have gradually been reduced in countries around the world
  • increased communication and improved transport has reduced barriers between countries
58
Q

what is an exchange rate?

A

the price of one countries currency in terms of another’s

59
Q

what is inflation?

A

An increase in the general level of prices within an economy

60
Q

what is protectionism?

A

the extent to which a government uses controls to restrict the amount of imports entering the country

61
Q

what is globalisation?

A

the increased integration and interdependence of national economies

A2 Business (15 decks)

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