External Economic influences on business behavior Flashcards
Economic growth
An increase in a country’s productive potential measured by an increase in its real GDP
Gross Domestic Product
The total value of goods and services produced in a country in one year- real GDP has been adjusted for inflation
Government economic objectives
- Economic growth
- Reduction of income inequalities (some gov)
- Low and stable rate of inflation
- BOP equilibrium
- Low rate of unemployment
Factors that lead to economic growth
Increases in output resulting from tech chances
Increases in economic resources
Increases in productivity
Business investment
Expenditure by businesses on capital equipment, technology and research and development.
Business cycle
The regular swings in economic activity, measured by real GDP, that occur in most economies, varying from boom conditions to recession when total national output declines.
Four key stages of business cycle
Boom
Downturn or recession
slump
Recovery and growth
Recession
A period of six month or more of declining real GDP
Inflation
An increase in the average price level of goods and services
Deflation
A fall in the average price level of goods and services
Causes of inflation
Cost-push inflation
Demand-pull inflation
Cost-push infaltion
Inflation caused by increases in the cost of production. Businesses are forced to increase the selling price to avoid making a loss
Demand-pull inflation
Too much demand for supply available of products. Businesses may be able to increase prices without demand falling- But this depend on the elasticity of demand
Working population
All those in the population of working age who are willing and able to work
Unemployment
The exists when members of the working population are willing and able to work, are unable to find a job.
Business strategy during a period of rapid inflation might focus on:
■ cutting back on investment spending
■ cutting profit margins to limit their own price rises to stay
as competitive as possible
■ reducing borrowing to levels at which the interest payments
are manageable
■ reducing time period for customers (trade receivables)
to pay
■ reducing labour costs.
Cyclical unemployment
Unemployment resulting from low demand for goods and services in the economy during a period of slow economic growth or a recession.
Structural unemployment:
unemployment caused by the decline in important industries, leading to significant job losses in one sector of industry.
Frictional unemployment:
unemployment resulting from workers losing or leaving jobs and taking a substantial period of time to find alternative employment.
Balance of payments
this account records the value of trade in goods and services between one country and the rest of the world. A deficit means that the value of goods and services imported exceeds the value of goods and services exported.
Exchange rate
the price of one currency in terms of another
Exchange Rate depreciation:
a fall in the external value of a currency as measured by its exchange rate against other currencies.
Imports
Goods and services purchases from other countries
Exports
Goods and services sold to consumers and business in other countries
Exchange Rate Appreciation:
a rise the external value of a currency as measured by its exchange rate against other currencies
Fiscal Policy
concerned with decisions about government expenditure, tax rates and government borrowing – these operate largely through the government’s annual budget decisions
Government Budget Deficit
the value of government spending exceeds revenue from taxation.
Government Budget Surplus:
taxation revenue exceeds the value of government spending.
Monetary policy:
is concerned with decisions about the rate of interest and the supply of money in the economy.
Fiscal policy can be used to
- raise rev
- vary gov spending
- Boost spending on goods and services (expan. fiscal pol)
- Reduce demand for goods
- cut gov deficit
Market Failure
when markets fail to achieve the most efficient allocation of resources and there is under- or overproduction of certain goods or services.
External costs
Costs of an economic activity that are not paid for by the producer of consume, but by the rest of society
Income Elasticity Of Demand:
measures the responsiveness of demand for a product after a change in consumer incomes.
