Economic influences

Question 1

Define the ECONOMY

Answer 1

The economy is a system through which resources are used by businesses to produce products that consumers want to consume, use or buy. In return the consumer is one of these resources - labour.

Question 2

Define GROSS DOMESTIC PRODUCT

Answer 2

Gross domestic product is the total market value of all final goods and services sold in a country within a year . Used to measure the size of the country’s economy.

Question 3

What are the elements of the business cycle?

Answer 3

Boom, recession, slump, recovery

Question 4

How might a business respond in times of growth/recovery?

Answer 4

Increase investment to maximise profit, increase capacity, employ new staff, expand through new products

Question 5

How might a business respond in times of recession/slump?

Answer 5

Cut back investment in order to manage cash flow, focus on core markets, scale back capacity, reduce the size of the workforce

Question 6

Define INFLATION

Answer 6

Inflation is a rise in the average price level of products in an economy. Normally expressed as a percentage.

Question 7

How is inflation measured?

Answer 7

• Annual price level percentage change
• Government then produces figures called the consumer price index. This is done by looking at the average household items bought and their prices. These are monitored and updated regularly.

Question 8

Why is inflation important?

Answer 8

• It effects how much people can buy given their income
• Government sets a target of 2% inflation per year and must try to stick to it.
• Effects a business’ international competitiveness

Question 9

How does inflation affect businesses?

Answer 9

• Increased costs
• Falling sales due to increased prices
• Decline in international competitiveness

Question 10

Define INTEREST RATES

Answer 10

Interest rates are the costs of borrowing and the reward for saving. Often referred to as the price of money.

Question 11

What is the impact if interest rates fall?

Answer 11

• Cost of loan repayment is reduced
• Consumer confidence is increased
• Disposable income rises
• Business investment is boosted
• Housing market has more demand and higher prices
• More spending/investment overall
  Higher economic growth means faster inflation.

Question 12

What is the impact is interest rates rise?

Answer 12

• Cost of loaning increases
• Higher mortgage payments mean consumer incomes are lower
• Other debt repayments (e.g. credit cards) are increased
• Housing market slows down
• Less spending/investment overall
• Lower levels of inflation
  Lower economic growth means slower inflation

Question 13

Define EXCHANGE RATES

Answer 13

Exchange rates are the price of one currency expressed in terms of another. If a currency increases in value, it appreciates. If a currency decreases in value, it depreciates.

Question 14

What causes exchange rates to change?

Answer 14

The rate of demand and supply in the currency market.

Question 15

What are the effects of a strong pound?

Answer 15

S trong 
P ound 
I mports
C heaper
E xports
D earer

Question 16

What are the effects of a weak pound?

Answer 16

W eaker 
P ound
I mports
D earer
E xports
C heaper

Question 17

Define TAXATION

Answer 17

Taxation is the process of imposing charges on businesses and individuals by the government.

Question 18

What are the different types of taxation?

Answer 18

Direct taxation - levied on income, wealth and profit.

Indirect taxation - levied on consumer spending

Question 19

Define GOVERNMENT SPENDING

Answer 19

Government spending is the expenditure of the government on supplying goods and services to achieve economic and politcal objectives.

Question 20

What are the three main areas of government spending?

Answer 20

• Transfer payments - welfare payments made to benefit citizens
• Current spending - spending on providing state funded goods and services such as education
• Capital spending - infrastructural spending (roads, hospitals etc)