external economic influences on business activity

Question 1

government assistance for entrepreneurs

Answer 1

offering loan guarantee schemes
providing information, advice and training schemes
financing the building of small workshops
reducing paperwork and legal formalities to set up new businesses
cutting rate of profit tax

Question 2

assistance for all businesses

Answer 2

subsidies to help keep prices down
subsidies to stop a loss making business failing
grants to relocate to particular areas with high unemployment
financial support that will increase national output

Question 3

market failure

Answer 3

when markets fail to achieve the most effective allocation of resources, resulting in under or overproduction of certain goods and services

Question 4

examples of market failure

Answer 4

external costs- a cost of an economic activity that are not paid for by the producer or consumer but by the rest of society

labour training- businesses do not provide sufficient training this causes to have a shortage of skilled professional workers reducing economic growth

monopoly producers- one supplier in the market leads to under provision of products compared to demand

Question 5

macroeconomic objectives key terms

Answer 5

the goals a government is aiming to achieve for the whole economy

economic growth- increase in a country’s productive potential measured by increase in real GDP

GDP-total value of goods and services produced in country in a year

real GDP- adjusted for inflation

inflation-increase in average price levels of goods and services resulting in the fall of value in money

unemployment- when the working force are unable to find jobs though willing

Question 6

economic growth

Answer 6

real level of GDP rises as a result of increases in physical output
recession-decline in real GDP of two or more quaters

Question 7

benefits of economic growth

Answer 7

real gdp growth raises living standards, higher output levels result from higher employments which increases consumer income, resources devoted to desirable public sectors eg health and education, absolute poverty can be reduced, rising demand for products IED, greater income from taxes and reduced spending on social benefits for government

Question 8

causes of economic growth

Answer 8

technological changes and expansion of indsutrial capacity- non-inflationary economy by encouraging business investments in new industries

increases in economic resources- higher working population , new oil or gas reserves.

increases in productivity- higher labour productivity-average output per employee- can be achieved with a more highly skilled workforce

Question 9

the business cycle

Answer 9

regular swings in output measured by real GDP that occur in most economies varying from boom conditions to recession

boom- rapid economic growth causes inflation due to high demand and increases in wages due to shortage of workers, it makes the economy products uncompetitive- business confidence falls profits hit by higher costs

downturn or recession- falling demand and higher interest rates, real gdp growth slows or starts to fall, demand falls and firms make record losses or fail , increase in demand for inferior goods, capital assets may be cheap

slump- prolonged recession can lead to slump, when real gdp falls substantially and product asses prices fall

recovery and growth- real gdp starts to increases again because of government action and low prices of products increases competivness in exports and demand increases

Question 10

inflation and deflation

Answer 10

deflation- a fall in the average price of goods and services

hyperinflation- very high and accelerating inflation which quickly erode the real value of local currency

cost-push causes of inlation- lower exchange rate pushing up prices of imported material, world demand for materials pushing up price, higher wage demand from workers

demand-pull causes of inflation- consumers demand rise during boom can cause producers to sell at higher price bc they could run out of inventories-supply shortages leading to excess demand

Question 11

causes of unemployment

Answer 11

cyclical unemployment- caused by low demand for goods and services during a period of slow economic growth or recession

structural unemployment- caused by the decline in important industries leading to significant job losses eg consumers tastes and expenditure patterns change, workers replaced bt tech, decline in heavy manufacturing industries

frictional unemployment- caused by worker losing or leaving jobs and taking substaial time to find alternative employment

Question 12

costs of unemployment

Answer 12

output of economy is lower than it could be reduces living standards , they are paid out of general taxation, increased social problems eg crimes, reduces demand for goods, skills become out of date.

impact on business- reduce demand for their products, easier to recruit new employees , workers may accept lower wages, government subsidies to encourage job creation

Question 13

government policies to increase macroeconomic objectives

Answer 13

monetary policy- decisions about the level of interest rates and the supply of money in the economy eg increases intrest costs and reduce profits for business in high debt

fiscal policy - decisions about the government expenditure, tax rates and government borrowing- only affect individual product markets

budget surplus- the value of taxation revenue exceeds the value of government spending

Question 14

supply side policies

Answer 14

government measure that aim to improve the competitiveness of the markets and the economy

reducing rates of income tax
reducing the rate of corporation tax
increasing labour market flexibility and labour productivity
spending on infrastructure projects
making it easier to start a business

Question 15

exchange rate policy

Answer 15

determined by the supply and demand of a country currency- if supply is greater the price of currency falls which is call exchange rate depreciation.
if the demand is greater than supply it is called exchange rate appreciation

appreciation domestic gainers- importers of foreign raw materials, foreign manufactured goods

losers- exporters of goods and services , businesses that sell to the domestic market and have foreign competitors,

depreciation domestic gainers- exporters that can reduce prices in their overseas markets, businesses selling in domestic markets will have less price competition

losers- manufactures who depend of importerd materials, retailers who purchase foreign supply especially if there’s domestic substitutes.

Question 16

international competitiveness

Answer 16

product design and innovation- eg apple iPhones will attract most customers even if sold at high prices

quality of construction/reliability eg japanese cars declared the most reliable in the US though they are not the cheapest

effective promotion and extensive distribution- eg Mcdonalds

after sales service- eg extended guarantee periods

investment in trained employees and modern technology- increased flexibility.

Question 17

impact of low inflation on business decisons

Answer 17

cost increases can be passed to customers, real value debt/liabilities will fall, value of fixed assets could rise, increased profit margin from inflation

Question 18

impact of high inflation on business decisons

Answer 18

employees will demand increase in wages to maintain real value, consumers more price sensitive, higher rates of interests , cash flow problems, reluctant to sell goods on credit bc repayments with money that lost value.

cutting back on investment , cutting profit margins and limiting prices, reducing borrowing, reducing time period for customers to pay back, reducing labor costs.