External environment: Economic change GDP- 3.75

Question 1

Economic growth

Answer 1

An increase in the amount of goods and services produced per head of the population over a period of time

Question 2

The business cycle or economic cycle

Answer 2

The fluctuation in the economic activity that an economy experiences over a period of time. A business cycle is basically designed in terms of periods of booms and slumps

Question 3

Gross domestic product (GDP)

Answer 3

the monetary value of all finished goods and services produced within a country’s borders is usually within a year

Question 4

Demand

Answer 4

How much of a good or service a consumer wants- and is able to pay for. For a business, demand turns into revenue (sales)

Question 5

What is the level of demand influenced by in most markets?

Answer 5

Rate of econmoic growth

Question 6

What is a “normal” long term growth rate for a mature economy like the UK

Answer 6

long term growth rate of around 2-3%

Question 7

What are the stages of the business cycle

Answer 7

Boom
recession
slump
recovery

Question 8

What is a boom in the business cycle

Answer 8

Consumer spending, business confidence, profits and investment - INCREASE

Prices and costs- INCREASE

Unemployment- DECREASE

Question 9

What is recession?

Answer 9

Consumer spending and confidence- DECREASE

Investment- INCREASE

Spare capacity- Increase

Unemployment- INCREASE

Question 10

What is slump/ depression

Answer 10

DECREASED consumer spending and investment

INCREASE business failures and unemployment

DECREASE prices

Question 11

What is recovery/downswing

Answer 11

Things start to get better

Spending and business confidence and investment get- INCREASE

DECREASED unemployment - slowly

Question 12

The level of economic activity can also be affected by external shocks to an economy like:

Answer 12

Global financial crisis
Eurozone economic crisis
Volatile commodity prices
China slowdown
International trade and investment deals
Currency volatility and policy change
Extreme weather events
Political uncertainty/ terrorism

Question 13

How do business maintain economic growth- which is one of the several key economic objectives

Answer 13

Price stability
Growth of real GDP
Falling unemployment/ raising employment
Higher average living standard
Stable balance of payments on the current account
An equitable distribution of income and wealth

Question 14

What is fiscal policy

Answer 14

Involves the use of the government spending, taxation and borrowing to affect the level and growth of aggregate demand, output and jobs (infrastructure)

Question 15

What is aggregate demand

Answer 15

Is the total demand for the final goods and services in an economy at any given time

Question 16

What is an interest rate

Answer 16

The reward for saving and the cost of borrowing expressed as a percentage of the money saved or borrowed

Question 17

Why does the government tax?

Answer 17

Raise revenue
Market failure and environmental targets
Managing aggregate demand (meet the government objectives)
Changing the distribution of income and wealth

Question 18

What is direct taxation and examples and can it be predicted

Answer 18

Levied on income, wealth and profit

Eg- income tax, national insurance, capital gains and business rates

Overall effect can be predicted

Question 19

What are indirect taxes, examples and can it be predicted

Answer 19

Levied on spending by consumers on goods and services

Eg- Excise duties on fuel and alcohol, betting tax and tv licence

Can have a rapid effect and are difficult to predict

Question 20

What is government spending

Answer 20

Government spending takes up around 40% of annual GDP

Question 21

What are three main areas of spending of the government

Answer 21

Transfer payments
Current spending
Capital spending

Question 22

What are transfer payment?

Answer 22

Welfare payments made to benefit people such as pension benefits

Question 23

What is current spending

Answer 23

Spending on state- provided goods and services such as education and health

Question 24

What is capital spending

Answer 24

Infrastructure spending such as spending on new roads, hospitals, motorways and prisons

Question 25

Why does the government spend

Answer 25

Public sector provision

Provide welfare support for low income households/ unemployed

Government spending can also be used as a tool to manage aggregate demand (GDP)

Government spending is also a means of redistributing income

Question 26

What are some of the many different interest rates operating in the economy

Answer 26

Interests rate on savings in the bank and other accounts

Borrowing interest rates

Mortgage
Credit card interest rates
Pay day loans

Question 27

What happens when Interest rates fall

Answer 27

Cost of servicing loans/ debts is reduced— boosting spending power

Consumer confidence should increase—leading to more spending

Effective disposal income rises- lower mortgage costs

Business investment should be boosted -eg prospect of rising demand

Housing market effects - more demand and higher property prices

Exchange rate and exports- cheaper currency will increase exports

Question 28

What happens when interest rates increase

Answer 28

Cost of servicing loans/ debts is increased — reduced spending power

Consumer confidence decrease —leading to less spending

Effective disposal income lowers - higher mortgage costs

Business investment decreases

Housing market effects - more demand and lower property prices

Exchange rate and exports-