Economic Enviroment

Question 1

What does GDP measure

Answer 1

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

Question 2

What is a rise in GDP/income called

Answer 2

Economic growth- tends to mean a rise in living standards and that households have more income to spend on business products

Question 3

What is a decline in GDP/income for 2 or more quarters called

Answer 3

Recession

Question 4

What is the business cycle (trade cycle)

Answer 4

Is a regular fluctuation of income and output (GDP) within an economy over time. There are 4 main phases: boom, recession, slump and recovery

Question 5

What is a boom (peak)

Answer 5

Is an above trend growth and characterised by high consumer and business confidence, high investment, rising prices, low unemployment and rampart speculation

Question 6

What is a recession

Answer 6

Occur when there are 2 or more quarters of negative growth and there is a general decline in economic activity

Question 7

What is a slump (trough)

Answer 7

There is a deep depression and the economy remains stagnant or declining for some time

Question 8

What is recovery

Answer 8

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

Question 9

What is income elasticity of demand

Answer 9

Used to show how income changes affect demand for certain goods, also shows whether a product is a normal or inferior good

Question 10

What is a normal good

Answer 10

A good which demand rises for as income increases

Question 11

What is an inferior good

Answer 11

A good for which demand falls as income rises

Question 12

Income elasticity of demand equation (YED)

Answer 12

% change in quantity of demanded / % change in income

Question 13

Negative YED

Answer 13

As income rises demand falls, negative income elasticity, inferior product type

Question 14

0 (neutral) YED

Answer 14

As income rises demand remains unchanged, 0 income elasticity, saturated product type

Question 15

Positive YED

Answer 15

As income rises demand rises, positive income elasticity, normal product type

Question 16

Dangers of recovery phase for a business

Answer 16

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.

Question 17

What is personal tax

Answer 17

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

Question 18

What is corporate tax

Answer 18

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

Question 19

What is fiscal policy

Answer 19

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

Question 20

Expansionary fiscal policy

Answer 20

Boosts the demand in economy and for businesses products

Question 21

Contractionary fiscal policy

Answer 21

Leads to a reduction in demand within the economy

Question 22

Impact of tax on businesses depends on tax changed pros

Answer 22

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

Question 23

Impact of tax on businesses depends on tax changed cons

Answer 23

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

Question 24

What is exchange rates

Answer 24

Compares the value of two countries currencies

Question 25

What is appreciation

Answer 25

A rise in exchange rate

Question 26

Exchange rate movements effect on import / export prices

Answer 26

Stronger Pound Imports Cheaper Exports Dearer

Question 27

Appreciation and depreciations effect on import and export prices

Answer 27

Appreciation decreases import prices and increase export prices
Depreciation increases import prices and decrease export prices

Question 28

Impacts of fluctuating exchange rates

Answer 28

Creates uncertainty and hard to plan for the future

Question 29

Firms decisions and strategies to deal with fluctuations or strong exchange rates

Answer 29

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

Question 30

Impact of depreciating currency

Answer 30

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

Question 31

What is inflation

Answer 31

A sustained increase in the average priced of goods and services, inflation also represents the fall in purchasing power of money

Question 32

What is deflation

Answer 32

A situation where prices persistently fall

Question 33

Advantages of inflation

Answer 33

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

Question 34

Disadvantages of inflation

Answer 34

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

Question 35

Strategies to deal with inflation

Answer 35

Lean production, Acquisition, Marketing mix, Business restructuring, Relocation, Internationalisation, Product and process innovation, Partnership, Employer-employee relationship, Re-shoring, Scale of production

Question 36

What is monetary policy

Answer 36

The control of interest rates and money supply in order to influence the level of spending in the economy

Question 37

Benefits of high interest rates

Answer 37

Encourage saving