Economic Influences (2.5.1)

Question 1

What do economic influences present to business activities?

Answer 1

They present significant opportunities and threats to business activities. Businesses need to anticipate and respond to changing economic variables in order to maximize their chance of success

Question 2

What economic variables need to be considered?

Answer 2

-Inflation
-Exchange Rates
-Interest Rates
-Tax and Gov spending
-Business cycle

Question 3

What is Inflation?

Answer 3

The general rise in prices in an economy over time

Question 4

How do you measure the change in price (inflation)?

Answer 4

The Consumer Price Index (CPI) measures monthly changes in the prices of a range of goods and services and compares these changes to earlier periods, calculating the rate of inflation

Question 5

What is the UK inflation rate target set by the Bank of England?

Answer 5

2%

Question 6

What will high inflation do to money?

Answer 6

Will feel like you have less money as things are getting more expensive and so you can buy less with your disposable income

Question 7

What will low inflation do to money?

Answer 7

Low inflation will feel like you have more money so you may spend more of it as you can buy more with your disposable income

Question 8

What does inflation depend on?

Answer 8

-Size of inflation change
-Consumer Disposable Income
-Length of Inflation Rise
-Liquidity

Question 9

What are interest rates?

Answer 9

The cost of borrowing money from a bank and the reward for saving money in a bank

Question 10

What’s the impact of high inflation on consumers?

Answer 10

-Less purchasing power as decrease in value for money and so can buy less with same amount of money.
-Less savings as prices are increased
-Loss of goods and services as decreased availability of goods and services

Question 11

What’s the impact of high inflation on businesses?

Answer 11

-Increased cost of Raw Materials
-Fewer people can afford certain goods and services
-Supply chains could face disruptions
-Savings stats look less attractive
-Interest rates on loans may rise

Question 12

What are problems caused by inflation?

Answer 12

-Increased costs as workers demand higher wages to compensate for higher costs of living and raw materials increase in price
-Higher repayments on loans as interest rates usually rise as Bank of England use base rate as a tool to control inflation which makes borrowing more expensive
-Consumers change spending habits which deters consumers from making significant purchases and they may reduce demand
-International competitiveness where domestic inflation rates are higher than those in other countries and so imports overseas firms are likely to be cheaper than domestic goods
-Uncertainty occurs when businesses can’t predict prices even in the ST and so survival is key

Question 13

What are interest rates?

Answer 13

% reward offered for saving money and % charged for borrowing money. Cost of borrowing money from a bank and the reward for saving money in a bank

Question 14

When interest rates go up what happens to the cost of borrowing?

Answer 14

Cost of borrowing goes up which puts people off getting a loan to make a bigger purchase

Question 15

When interest rates go up what happens to the reward for saving?

Answer 15

Reward for saving goes up which encourages people to save their money instead of spending it

Question 16

What is the impact of rising interest rates on business/ consumers?

Answer 16

-Reduce consumer spending and business investment
-More expensive to companies to borrow money from banks
-Reduce spending and consumer demand- decrease in inflation
-Reduces consumers disposable income
-Firms less likely to take out risky investments

Question 17

What is the impact of falling interest rates on business/ consumers?

Answer 17

Businesses:
-Cost of borrowing decreases and so increased expansion
-Increased consumption and so increased demand for businesses
-Investment decisions adjusted

Consumers:
-Mortgages and loans pay less interest and so more disposable income
-Increase consumer spending
-Less interest on savings

Question 18

How does more people in work increase sales for businesses?

Answer 18

If there are more people in work it means more people earning and income and so more people have money to spend which means the overall consumption and sales will increase for businesses

Question 19

What are Exchange Rates?

Answer 19

The price of one currency in terms of another. Value of one currency for the purpose of conversion to another

Question 20

Why do exchange rates fluctuate?

Answer 20

-Changing demand for a currency
-Economic Growth
-Changes to interest rates

Question 21

What are Imports?

Answer 21

Goods and services produced overseas and consumed by individuals/firms in the UK

Question 22

What are Exports?

Answer 22

Goods and services produced in the UK and consumed by individuals/firms overseas

Question 23

What is SPICED?

Answer 23

Strong Pound Imports Cheaper Exports Dearer

Question 24

What is the effect of SPICED on consumers and businesses?

Answer 24

UK Consumers and some UK businesses will be happy as means they pay less for imports but some UK businesses will be unhappy as other countries wont want to pay increased prices for their exports

Question 25

What is WIDEC

Answer 25

Weaker (Pound) Imports Dearer Exports Cheaper

Question 26

What is the effect of WIDEC on consumers and businesses?

Answer 26

UK Consumers and some UK businesses will be unhappy as means they pay more for imports but some UK businesses will be happy as other countries will want to buy more as exports are cheaper

Question 27

What is Gross Domestic Products (GDP)?

Answer 27

Total value of finished goods and services produced in a year.

Question 28

What does higher GDP mean?

Answer 28

Means we are producing more goods and services in the UK

Question 29

What is Taxation?

Answer 29

Amount of money paid to the Government

Question 30

What are the two types of tax? What do they tax?

Answer 30

-Direct Tax- levied on income -Indirect Tax- Levied on spending

Question 31

What are some examples of tax? Are they Direct or Indirect?

Answer 31

-Income Tax (Direct) -Corporation Tax (Direct) -VAT (Indirect)

Question 32

What is Income Tax?

Answer 32

Tax brackets= 20% for up to12,750 40% for 12,750-50,270 45% for 125,140+

Question 33

What is Corporation Tax?

Answer 33

Under 50,000 profit=19% Over 250,000 profit= 25%

Question 34

What is VAT?

Answer 34

Value added tax which is a direct tax placed on goods and services and in the UK it is 20%

Question 35

What is the impact of increasing tax?

Answer 35

-Revenue may fall for many businesses as increased income tax will reduce disposable income and increased VAT will make products more expensive and so customers may switch to alternatives -Costs especially operating costs will rise as a result of VAT and NI increasing which could mean higher prices and so lower sales and decrease in profit -Business Decisions on spending and investment may be affected as less profit retained and so businesses may choose to relocate or employ fewer employees or may try to avoid taxes

Question 36

What is Government spending?

Answer 36

Spending on Public services and public sector wages, infrastructure and welfare

Question 37

If you increase Gov Spending what happens?

Answer 37

-Public sector wages+ people on welfare may have more disposable income -Infrastructure projects generate jobs which creates more disposable income

Question 38

If you decrease Gov Spending what happens?

Answer 38

-Cuts to public sector wages and welfare reduce their disposable income -Less jobs created through projects which means less disposable income

Question 39

What is Unemployment?

Answer 39

The amount of working age people (16-64) not currently in employment but are actively seeking work

Question 40

What is the business cycle?

Answer 40

Describes the upturns and downturns in the level of a country's economic activity (GDP) over time

Question 41

What is a recession?

Answer 41

Occurs when an economy experiences two consecutive quarters (6 months) or more of negative economic growth

Question 42

What are the characteristics of a recession?

Answer 42

-Increasing/high unemployment -Low confidence for firms/households -Low inflation or deflation -Increase in government expenditure

Question 43

What is the impact of a recession on businesses?

Answer 43

-Customers have less disposable income -Businesses may find it relatively easy to recruit -Businesses may delay spending decisions and focus on survival -Production levels are likely to be reduced -Businesses often stockpile products -increased spending on welfare benefits and infrastructure which may benefit some businesses

Question 44

What is a boom?

Answer 44

Is defined as a period of time where an economy experiences increasing/high rates of economic growth

Question 45

What are the characteristics of a Boom?

Answer 45

-Decreasing unemployment and increasing job vacancies -High confidence and more risky decisions taken -Increasing rate of inflation -An improvement in the gov budget as tax revenues rise and gov expenditure falls

Question 46

What is the impact on businesses of a boom?

Answer 46

-Disposable income increases leading to higher sales revenue -Recruitment and staff retention may become difficult as businesses need to pay higher wages -Businesses look to expand and maximise profit -Production levels are likely to increase -Product or market development strategies are more likely -Interest rates are likely to rise and higher costs of borrowing -Lower gov spendig -public sector pay controls may cause industrial unrest and affect business operations

Question 47

What is Economic Uncertainty and when does it occur?

Answer 47

Occurs when it is difficult to forecast the level of supply and demand in an economy. Businesses will find planning difficult and are likely to be reluctant to make significant decisions

Question 48

Why may economic uncertainty happen?

Answer 48

-Fluctuating exchange rate -Economic growth uncertainty -Turbulence in the price of key commodities