Economic Enviroment Flashcards
What does GDP measure
Output produced by a nation per year
This is also equal to the total income generated by a nation in a year and the total expenditure by a nation in a year
What is a rise in GDP/income called
Economic growth- tends to mean a rise in living standards and that households have more income to spend on business products
What is a decline in GDP/income for 2 or more quarters called
Recession
What is the business cycle (trade cycle)
Is a regular fluctuation of income and output (GDP) within an economy over time. There are 4 main phases: boom, recession, slump and recovery
What is a boom (peak)
Is an above trend growth and characterised by high consumer and business confidence, high investment, rising prices, low unemployment and rampart speculation
What is a recession
Occur when there are 2 or more quarters of negative growth and there is a general decline in economic activity
What is a slump (trough)
There is a deep depression and the economy remains stagnant or declining for some time
What is recovery
Occurs when growth resumes after a downturn. Dangerous for businesses who have low reserves following recession and may expand too quickly (overtrading) as demand picks up and run out of cash
What is income elasticity of demand
Used to show how income changes affect demand for certain goods, also shows whether a product is a normal or inferior good
What is a normal good
A good which demand rises for as income increases
What is an inferior good
A good for which demand falls as income rises
Income elasticity of demand equation (YED)
% change in quantity of demanded / % change in income
Negative YED
As income rises demand falls, negative income elasticity, inferior product type
0 (neutral) YED
As income rises demand remains unchanged, 0 income elasticity, saturated product type
Positive YED
As income rises demand rises, positive income elasticity, normal product type
Dangers of recovery phase for a business
At the end of a recession firms often have few liquid reserves, as disposable income rises and spending increases there is a temptation to expand production, due to the cash flow cycle this is dangerous, expansion leads to cash outflow before cash inflow and this the current ratio may fall and the firm becomes insolvent, I.e. overtrading.
What is personal tax
Is a levy on business households, e.g. income tax or council tax, the taxes imposed on households cause the, to have less disposable income to spend on business products
What is corporate tax
A left on business organisations, e.g. corporation tax, business, excise duty. The UK has been trying to charge a low rate of corporation tax to encourage businesses to register in the UK, it is charged at 19% in 2021. If businesses are taxed then their costs rise and it may reduce their reserves so it is harder to invest, taxes may also damage cash flow
What is fiscal policy
The use of taxation and government expenditure to influence the economy, the changes to fiscal policy are usually announced by the Chancellor in the budget
Expansionary fiscal policy
Boosts the demand in economy and for businesses products
Contractionary fiscal policy
Leads to a reduction in demand within the economy
Impact of tax on businesses depends on tax changed pros
Producers of inferior goods can gain sales as disposable income falls
Generates revenue for government
If other products are taxed heavily then consumers may switch to the less taxed product
High tax may dissuade new entrants from setting up
Impact of tax on businesses depends on tax changed cons
Taxing consumers directly reduces their disposable income and reduces demand
direct company taxes leaves businesses with less retained profit
Indirect taxes add to the price and can dissuade people from buying those items reducing demand
High corporate taxes may make firms internationally uncompetitive
What is exchange rates
Compares the value of two countries currencies
What is appreciation
A rise in exchange rate
Exchange rate movements effect on import / export prices
Stronger Pound Imports Cheaper Exports Dearer
Appreciation and depreciations effect on import and export prices
Appreciation decreases import prices and increase export prices
Depreciation increases import prices and decrease export prices
Impacts of fluctuating exchange rates
Creates uncertainty and hard to plan for the future
Firms decisions and strategies to deal with fluctuations or strong exchange rates
Innovation, branding to develop inelastic demand- if firms develop a USP the high price may matter
Hedging- a way of minimising risk investors hedge one investment by making a trade in another. A reduction in risk, therefore, always means a reduction in potential profits
Lean production- cutting costs making firms more competitive
Diversify- a strategy to shift into something where exchange rate is less important
Impact of depreciating currency
Causes export prices to fall giving the opportunity to expand foreign sales particularly if demand is elastic, it also allows for the option to keep the export prices the same and increase profit margins, also provides opportunities to sell more domestically as foreign rivals’ products become dearer
What is inflation
A sustained increase in the average priced of goods and services, inflation also represents the fall in purchasing power of money
What is deflation
A situation where prices persistently fall
Advantages of inflation
Benefits the firms that can rise prices and boost profit margins
Rise in inflation boosts asset prices this helps the balance sheet in nominal terms.
Anyone in debt may benefit from inflation
Disadvantages of inflation
Rising costs damage margins and firms may struggle to pass on the increase in terms of price rises if demand in price elastic
As inflation increases workers real wages levels drop which de motivates them according to Taylor
If inflation is higher than other countries it could mean that international competitiveness is reduced
Strategies to deal with inflation
Lean production, Acquisition, Marketing mix, Business restructuring, Relocation, Internationalisation, Product and process innovation, Partnership, Employer-employee relationship, Re-shoring, Scale of production
What is monetary policy
The control of interest rates and money supply in order to influence the level of spending in the economy
Benefits of high interest rates
Encourage saving
