Economic Factors - GDP & Economic Cycle + Economic Policy (monetary and fiscal for tax, interest and inflation) Flashcards
How to measure economic growth
With GDP
= it’s the total value of output in an economy (goods+services)
= measured every 3 months
= am estimate for, questionnaires based on 46,000 British firms
= currently at 0.4-0.5
What’s the economy
The collective behaviour of a number of different groups I.e.
- government
- people acting as employees of businesses and consumers of their products
- the different business sectors in the UK
- UK’s trading relationship with other countries especially EU
What’s macro economics
The study and analysis of the behaviour of the whole economy
Marco economic objectives:
= a low and stable inflation rate
= high employment levels
= economic growth
What’s inflation
inflation is the persistent tendency for prices to rise = high rate is bad so bad for business
Why you want a low level of inflation
Makes UK exports uncompetitive
- due to globalisation any products can be made anywhere in the world so if the UK has a high inflation rate then those in other countries, the price of UK exports will be less attractive to consumers abroad
Inflation can reduce investment
- MNC look to produce in cheapest possible location and don’t want to locate where raw materials and labour is expensive as it makes their products uncompetitive
Inflation creates uncertainty
- managers don’t like uncertainty to investment returns so with a deflating inflation then how much will the returns be worth then? With low inflation rates, businesses can plan their investments with a certain degree of certainty about their financial return to encourage investment
Why high level of employment is an i,portent macroeconomic objective
- because unemployment is a waste of Human Resources
- unemployment is bad for the individual as it’s associated with social problems i.e drug abuse
- it’s bad for society as a whole as it has to be paid for with benefits
Why economic growth is an objective
Main benefit to it is that if more goods and services are produced then people have a higher standard of living
Growth should be sustainable considering future generations and the environment etc.
Balance of payments equilibrium
Term used to describe the financial records of the UK’s trade with the rest of the world
Inflows and outflows of money = the balance of trade
The balance of trade is the record of all the UK’S imports and exports
Trade deficit = MORE IMPORTS THAN EXPORTS
Trade surplus = MORE EXPORTS THAN IMPORTS
How economic policy has an effect on businesses
It’s concerned with trying to meet the 4 objectives and creating a environment where the businesses will thrive + grow
Done through:
- monetary policy
- fiscal policy
- supply side policies
- exchange rate
Has to use economic policy to alter behaviour of people as it cannot simply tell them what to do
They’re used depending on what economic objectives the government or bank or England are trying to achieve
Monetary Policy
Concerned with MANIPULATING THE LEVEL OF DEMAND IN THE ECONOMY through INTEREST
What the rate of interest is concerned with and to who
TO BORROWERS
- the cost of borrowing
TO SAVERS
- the reward for saving
There are also different rates for the different savers and the different rates for the different borrowers I.e. how long it’s for, how much it is, depending on risk)
Essentially it’s the price of money
Who sets interest rates
The Bank of England as they’re at the top of the banking hierarchy and feed it down to the customer
Currently 0.5% but was 0.25% but the actual rate is the rate your bank has set you - LEND at more than THEY SAVE rate
How monetary policy works
The demand for money responds to changes in the rate of interest
^^^ the price of something will effect its demand in the first place
Bank of England operating it and adjusting how people respond
I.e. Want consumers to spend less =
= raises interest to discourage borrowing and spending
= fall in demand for money
= encourage saving perhaps
If the Bank of England wants to slow down the economy + control inflation by lowering consumer spending and business investment then it will raise the interest rate
Ideal interest rate
The higher the better!!!!!!
Rise in interest rates will mean
A fall in investment
- more expensive to borrow then less likely to expand or make update machinery etc.
- suppliers of the machinery will receive a fall in investment
- slow down consumer spending
- no one will want to invest so a slow down of economic activity that could cause a recession
Consumer spending will fall
- spending on other products falls as there is a rise for spending on mortgages, loans etc
- not enough demand for luxury goods
- people saving their money so less spending
- people with lots of loan debts can’t save
- also slow down rate of growth of house prices so their property value won’t rise and so they may feel less confidence about spending so demand will be lower
STERLING POUND IS MORE ATTRACTIVE
Fall in interest rates will mean
More investment
- investments made with borrowed money so it’s now cheaper to borrow money
- expansion and spending
- investment raises the level of economic activity
- boosts GDP
- more consumer spending
- more competition
Consumer spending will increase
- now pay less interest on mortgages/loans etc so goods and services purchasing will be higher
UK EXPORTS ARE CHEAPER AND IMPORTS EXPENSIVE WITH WEAK £
What’s the credit crunch
2008 financial crises
Mortgages and loans were harder to obtain and costed more
Overcame this by lowering interest rates to make it easier and cheaper for businesses and customers to repay loans and feel confident about lending again
How long does it take for interest rates to come into action
Bank of England working on a 8 month timescale for interest rates changes to have their full effect on investment, consumption and the exchange rate
Consumers also take their time to react in response to the change
Hopes to do it gradually anyway rather than suddenly
What’s fiscal policy
Conducted through Taxation and Government spending
Controlled by the government through the chancellor of the exchequer
It affects the level of demand in the economy
Direct tax vs. Indirect tax
Taxes you pay specifically (income tax)
Whereas indirect tax is:
Tax being paid through so,some else or another organisation (VAT)
Last year what the government collected for, us and what it spent back on us
Government collected £612 billion
Spent back £720 billion in us
How? It’s more?
= £108 billion was from borrowing to fill the gap using BONDS
= where you borrow money off people looking to save and spend it back with interest later on
Types of taxes
- VAT = 20% indirect
- Road Tax = direct
- Excise Duty = out the price up to deter you away but it’s inelastic demand and will be bought anyway
- Sugar/fat Tax
- Plastic bags
- Petrol = consuming it contributes to economy environmentally
- Gambling tax = 10%
- Council Tax
- Stamp Duty (for moving house)
- Inheritance Tax
- Income Tax
- National Insurance
The big 3 taxes
= Income Tax
As it goes up ⬆️, people are poorer and there’s less disposable income, demand ⬇️, revenue ⬇️, profit ⬇️»»» back to the start in a loop
= VAT and Duty Tax
Price ⬆️ so demand ⬇️ = PED
= Corporation Tax
The tax on profit for Ltd and Plc
Income tax for Partnership and Sole Trader
Retained profit ⬇️, dividends ⬇️, investment ⬇️, expansion ⬇️, unemployment ⬇️
Depends on
- which tax it is
- size of the tax change
- PED
- the type of good (could respond different if its luxury)
- size of the tax originally
- MPC = Marginal Propensity to Consume
= what you’re likely to do with the extra money you had if you had it
Supply side policies
Where fiscal and monetary policies manipulate level of demand where’s supply side policies aim to improve the economy’s overall productive capacity
Designed to make markers and industries operate more efficiently
Contribute to a faster rate of economic growth as well as a more sustainable growth = less danger of inflation from a rise in demand if total supply is also increasing
They also make a country more competitive internationally too
Essential for the long term health of a country and living standards
Supply side policies;
- reducing welfare benefits so the unemployed can take jobs
- cut income tax so people seek work so they can keep more of their money they earn
- cut corporation tax so a business is encouraged to invest in new things like buildings or R+D
- I,proved education and training to improve the workforce skills, flexibility and productivity
- encourage business start ups and expansion
