Economic Impacts Flashcards
The Economy
>Economic growth is measured in the UK using gross domestic product (GDP)
>GDP is a measure of the value of all the goods and services produced in the UK.
>GDP is measured every 3 months and growth or decline is seen.
1) Growth
2) Boom
3) Decline
4) Recession
5) Bust
6) Recovery
Growth - The stage where GDP is growing
This usually means more employees are needed. As more people earn more more spending occurs increasing growth. Prices rise as a result of Higher wages.
Boom
Demand is at its highest. Prices and wages are also at their highest. High level of domestic product and imports being consumed. The level of growth is not sustainable and the economy will go into decline.
Decline
The economy starts to slow down - fewer products and services are purchased. Unemployment will start to rise and firms will try to reduce their production quickly. Wages and prices tend not to change at this stage.
Recession
Start to see very high levels of unemployment as firms try to reduce costs. This affects consumer confidence and spending in shops starts to fall. Wages remain the same but prices may start to be brought down.
Bust
The economy is now experiencing very high unemployment and there is a correction to wages and prices. Very little to no new investment.
Recovery
Where the economy is taken out of a slump using various measures to encourage investment.
Inflation - Retail price index
>Measured using a standard basket of items bought from the shops
>Included the prices of houses
>Criticised because house price can fluctuate quickly in different areas
>Therefore Consumer Price Index has been introduced
Inflation - Consumer price index
>Typically lower than Retail price index
>Raw material price can have impact
>Oil price for example when cheaper makes transport cheaper this is passed on in the shops as cheaper prices
>Fracking has meant cheaper source of energy meaning cheaper transport
Demand Pull Inflation
>Inflation that is caused because of increases in demand.
E.G people wanting a particular food which is in short supply or mentioned by a famous chef
>A particular trend or fashion that causes prices to go up
E.G Supreme clothing or holidays during summer
Cost Push Inflation
>When the cost of raw materials go up, the costs of production increase and passed on in higher prices to the public
>Oil has and electric prices go up so do the prices the customer has to pay
Inflation other factors
> Wages - when wages increase prices tend to follow.
> This is in accordance with the supply line in the supply and demand model.
The reverse doesn’t necessarily occur, petrol prices decrease slower than they increase.
Positive or Negative
-Negative due to the consumer having to pay higher prices
+Positive as increased prices increases asset price
+Without inflation you may get deflation, price reduction
Upswing
Prices slowly rise as confidence starts to increase
Boom
Prices (during rapid growth) go up very fast to highest levels become unsustainable
Downswing
Prices tend not to change during decline firms try to avoid reducing prices as this significantly effects profitability
Bust/ Recession
Prices will remain steady (some may increase slightly) as firms start to produce more products and customers begin to buy during recovery.
Deflation
>Dropping prices put people off spending
>If prices in shops are falling the value of possessions also falls
>Investors will not invest in struggling businesses
Consequences: >Fall in demand in the economy >Higher unemployment >Weakening of the currency >Downward spiral towards recession
Taxation
>These are sums of money collected by the government
>They are either collected directly at source - Direct taxes
>Or they maybe collected as a result of a persons actions - Indirect taxes
>The collection of taxes and how they’re spent is called fiscal policy
There are 4 main types of tax
1) Income tax - Tax paid directly from peoples wages
2) Corporation tax - Tax paid on a companies profit
3) National insurance - A tax paid on a persons earnings
4) Value added tax - VAT an indirect tax paid on certain goods
Taxation and government objectives
Taxes are collected for 2 reasons
1) To pay for public services
2) To redistribute money to the poorest in society
Different types of taxes
1) Progressive - People who earn the most pay the most
2) Proportional - Everyone pays the same amount
3) Regressive - The people who earn the least pay the most
Unemployment in the Business cycle
Upswing:
Unemployment is likely to fall as increased demand means more jobs to provide more products and services
Boom:
Unemployment is likely to fall rapidly and will probably reach its lowest stage
Downswing:
Unemployment will rise at a very fast rate as customers lose confidence and firms want to cut spending
Bust/ Recession:
Unemployment will fall at this stage but it will be slow due to weak confidence in shops
Interest Rates
These are set every month by the bank of england. By the Monetary policy committee (MPC).
The bank of england lends money to every major bank at a base rate of 0.75%
Interest rates are used to change the rate of GDP economic growth.
Rapid Growth
>If the rate of economic growth is too high then prices and wages also tend to increase.
>Higher prices and wages are a problem - Prices become to high and make products unaffordable.
Slow Growth
>Prices and Wages become an issue
>Wages get too high employers make workers redundant
Rule 1: If interest rates are high people stop spending, save more and the level of demand decreases
Rule 2: If interest rates are too low people borrow more, Spend more and the level of demand increases
Interest and Exchange rates
>Exchange rate is the rate charger for changing one currency to another.
>The rate of interest is important between two countries because it effect the exchange rate.
Exchange rate factors
>Strength of the economy
>£ has increased in strength
>The amount of trading between countries
-> When countries trade they need to convert their currencies so demand increases
-> Increasing the demand pushes up the currency value strengthening it
>Political situation - strong stable economies are more likely to be invested in therefore higher demand in certain currencies.
