Economic Influences (2.5.1) Flashcards
What do economic influences present to business activities?
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
What economic variables need to be considered?
-Inflation
-Exchange Rates
-Interest Rates
-Tax and Gov spending
-Business cycle
What is Inflation?
The general rise in prices in an economy over time
How do you measure the change in price (inflation)?
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
What is the UK inflation rate target set by the Bank of England?
2%
What will high inflation do to money?
Will feel like you have less money as things are getting more expensive and so you can buy less with your disposable income
What will low inflation do to money?
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
What does inflation depend on?
-Size of inflation change
-Consumer Disposable Income
-Length of Inflation Rise
-Liquidity
What are inflation rates?
The cost of borrowing money from a bank and the reward for saving money in a bank
What’s the impact of high inflation on consumers?
-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
What’s the impact of high inflation on businesses?
-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
What are problems caused by inflation?
-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
What are interest rates?
% 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
When interest rates go up what happens to the cost of borrowing?
Cost of borrowing goes up which puts people off getting a loan to make a bigger purchase
When interest rates go up what happens to the reward for saving?
Reward for saving goes up which encourages people to save their money instead of spending it
What is the impact of rising interest rates on business/ consumers?
-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
What is the impact of falling interest rates on business/ consumers?
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
How does more people in work increase sales for businesses?
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
What are Exchange Rates?
The price of one currency in terms of another. Value of one currency for the purpose of conversion to another
Why do exchange rates fluctuate?
-Changing demand for a currency
-Economic Growth
-Changes to interest rates
What are Imports?
Goods and services produced overseas and consumed by individuals/firms in the UK
What are Exports?
Goods and services produced in the UK and consumed by individuals/firms overseas
What is SPICED?
Strong Pound Imports Cheaper Exports Dearer
What is the effect of SPICED on consumers and businesses?
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
What is WIDEC
Weaker (Pound) Imports Dearer Exports Cheaper
What is the effect of WIDEC on consumers and businesses?
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
What is Gross Domestic Products (GDP)?
Total value of finished goods and services produced in a year.
What does higher GDP mean?
Means we are producing more goods and services in the UK
What is Taxation?
Amount of money paid to the Government
What are the two types of tax? What do they tax?
-Direct Tax- levied on income
-Indirect Tax- Levied on spending
What are some examples of tax? Are they Direct or Indirect?
-Income Tax (Direct)
-Corporation Tax (Direct)
-VAT (Indirect)
What is Income Tax?
Tax brackets=
20% for up to12,750
40% for 12,750-50,270
45% for 125,140+
What is Corporation Tax?
Under 50,000 profit=19%
Over 250,000 profit= 25%
What is VAT?
Value added tax which is a direct tax placed on goods and services and in the UK it is 20%
What is the impact of increasing tax?
-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
What is Government spending?
Spending on Public services and public sector wages, infrastructure and welfare
If you increase Gov Spending what happens?
-Public sector wages+ people on welfare may have more disposable income
-Infrastructure projects generate jobs which creates more disposable income
If you decrease Gov Spending what happens?
-Cuts to public sector wages and welfare reduce their disposable income
-Less jobs created through projects which means less disposable income
What is Unemployment?
The amount of working age people (16-64) not currently in employment but are actively seeking work
What is the business cycle?
Describes the upturns and downturns in the level of a country’s economic activity (GDP) over time
What is a recession?
Occurs when an economy experiences two consecutive quarters (6 months) or more of negative economic growth
What are the characteristics of a recession?
-Increasing/high unemployment
-Low confidence for firms/households
-Low inflation or deflation
-Increase in government expenditure
What is the impact of a recession on businesses?
-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
What is a boom?
Is defined as a period of time where an economy experiences increasing/high rates of economic growth
What are the characteristics of a Boom?
-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
What is the impact on businesses of a boom?
-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
What is Economic Uncertainty and when does it occur?
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
Why may economic uncertainty happen?
-Fluctuating exchange rate
-Economic growth uncertainty
-Turbulence in the price of key commodities
