Economic influences Flashcards
Define the term economic influence.
Economic influence is when a business is affected in any way by economic factors e.g. inflation, exchange rates etc.
What is inflation?
The annual rate of inflation shows how much higher or lower prices are compared with the same month a year earlier. It indicates changes to our cost of living
The inflation rate is the rise in the price of goods in the UK economy
Deflation would be a fall in the general price level
Inflation is measured using the CPI
What is the consumer price index?
Consumer price index is the rate at which the prices of goods and services bought by households rise or fall.
CPI looks at the prices of hundreds of things we commonly spend money on, including bread, cinema tickets and pints of beer - and tracks how these prices have changed over time.
The inflation rates are expressed as percentages. If CPI is 3%, this means that on average, the price of products and services we buy is 3% higher than a year earlier.
How are businesses affected by changes in inflation?
As inflation rises so does the cost of products and services
Cost of supplies, ingredients and raw materials will go up
As costs go up due to inflation, business owners may need to increase their prices to maintain profitability
Profit margins will be reduced
What are exchange rates?
The exchange rate is the price of one currency in exchange for another
Currencies can change in value and this is due to the demand and supply of a currency
What is appreciation in exchange rates?
Appreciation means that there is a rise in the £pound against other currencies means the £pound can buy MORE foreign currency
This may also be called a high value or strong value of the pound
Strong pound means that imports will be cheaper and exports will be more expensive
SPICED: Strong pound imports cheaper exports dearer
Explain depreciation in exchange rates.
A fall in £pound is called depreciation
UK decision to leave the EU meant that the £pound fell sharply against other currencies
This is bad news for UK tourists as their money will be worth less abroad
This is also bad news for any UK businesses that import goods and services
Explain interest rates and the Bank of England.
Interest rates means the cost of borrowing money
The Bank of England is now responsible for deciding what the interest rate should be in the UK
If the bank of England pushes up interest rates consumer and business spending will fall
The bank of England will raise interest rates if inflation is high and lower them if inflation is not a problem within the economy
Lower interest rates encourage economic growth and a fall in unemployment
Explain the cost of borrowing and interest rates.
If interest rates on a loan are low then consumers may borrow money
If interest rates go up then consumers will not borrow and so will save instead of spending, this is bad news for UK businesses as people will have less disposable income.
How are businesses affected by changes in interest rates?
If interest rates rise then the cost of borrowing will rise and this will mean that the cost of supplies for a business may increase
A fall in interest rates means that the cost of lending falls which may lead to an increase in profits
What is taxation?
The government can change the way businesses work and influence the economy by changing taxes
These are announced each year in the budget which is given by the Chancellor of the Exchequer
How might a business be affected by changes in taxation?
Lower taxes can result in more demand in the economy and lead to higher output and employment
If taxes are high then UK businesses will have higher costs
This makes them less competitive in a global marketplace
It may also mean unemployment rates may rise as businesses have to lay off extra staff due to the reduction in demand
Explain taxation and VAT.
If the % of VAT goes up a business could pass this cost on to the consumer so if makes goods more expensive to buy, or absorb the cost which will have an impact on their profit margin.
VAT is charged on things like: Business sales Hiring or loaning goods Selling business assets Commission
Explain UK taxation for small businesses.
UK taxes for sole traders:
Income tax: taken off an employee’s or business owners’ salary. This results in less money to spend in the shops
VAT (only if they earn above £82,000) added to goods and services. A rise in VAT increases prices.
Business rates (but not if the work from home)
National insurance: contributions are payments made by both the employee and the employer. They pay for the cost of a state pension and the National Health Service. An increase in this tax raises a company’s costs and could result in inflation.
Explain UK taxation for larger business?
UK taxes for ltd and plc businesses:
Corporation tax at 20%
VAT at 20%
Business rates on business premises
National Insurance contributions to employees
These are all costs to a business
Explain UK taxation and excise duties.
Excise duty has to be paid by customers on products which are considered to have negative effects on society, in essence a sin tax e.g. fuel, tobacco, beer, wine and spirits
What is government spending?
Taxes that the government collects goes into a central pot – this is then spent on various things for the benefit of the UK society
The person who makes the decisions about tax and how to spend it is the Chancellor of the Exchequer also known as the treasurer
How are businesses affected by changes in government spending?
If the government decides to cut government spending to reduce the deficit (amount it owes) this can have an impact on businesses which supply goods or services to public organisations e.g. the NHS
Businesses affected for example in spending cuts may be care home providers, school builders.
What is the business cycle?
Economists have noticed that demand and output in the UK changes, it goes up and down in a cycle pattern
This is called the business cycle.
It includes the boom, recession, slump, and recovery
Explain the boom in a business cycle.
In boom times the UK enjoys a period of high consumer spending
As consumers are spending there is an increased demand for goods and services
This increase in demand means an increase in work, lower unemployment and higher wages
This leads to more people in work able to buy more goods and services
Explain the recession in a business cycle.
In times of recession the UK experiences falling levels of demand
This means that consumers will demand less goods and services as they seek to save their money rather than spend – they worry about borrowing in case the interest rates go up
Businesses will typically have to make redundancies to lower costs and will have lower profits as demand falls
Explain the slump in a business cycle.
A slump is the bottom of the economic cycle where consumer confidence and spending is at its lowest
There is usually very little investment in businesses and high levels of unemployment as demand for goods and services falls to its lowest level
Explain the recovery in a business cycle.
In the recovery phase of the cycle demand levels for goods and services start to improve
Unemployment will start to fall as businesses start to take on workers to meet new improving levels of demand
Consumer confidence starts to return and consumers start to buy larger items again
Explain the impact of economic uncertainty in the UK on businesses.
A series of financial shocks since the recession in the UK in 2008 has meant that there has been macroeconomic uncertainly
This means that with a risk of unemployment that consumers are delaying the purchase of goods
This means that demand falls for goods and services
As a result of uncertainty manufacturers are reluctant to expand and to grow which affects and reduces supply of goods and services
