(PAPER 3) 2.5.1 economic influences* Flashcards
inflation definition
a sustained increase in the cost of living or the general price level
causes of inflation
> demand-pull inflation = too much demand for goods and services, usually because of an increase in consumer incomes- business cannot supply fast enough so prices are increased
cost-push inflation = when rising cost, such as employee wages, push prices up.
Exchange rate definition
the value of one currency expressed in terms of another
Appreciation definition
a rise in the value of a currency
E.g. if £1changed from being worth $1.20 to $1.60 it has strengthened cause you can buy 0.40 more dollars with every pound
Appreciation makes UK exports more expensive abroad = bad for UK exports cause their prices are less competitive- means that UK exports may need to reduce their prices which will affect their profits.
An increase in the exchange rate is good for UK importers because imports become cheaper= more profit for every imported item sold in UK
Depreciation definition
A fall in the value of a currency
If the pound becomes weaker this is known as depreciation.
E.g. if £1 changed from being $1.60 to $1.20 it has weekend cause you can buy 0.40 dollars less with every pound.
UK exports become cheaper when the exchange rate decreases- good for UK exporters cause their products become more competitively priced abroad and so may be cheaper than other similar products in other countries- could increase demand or the exporter could increase their price in pounds which will increase profitability but won’t increase demand.
UK imports are damaged by a weaker exchange rate because their imported stock costs more- firms could react by increasing their prices but could lead to a fall in demand. These businesses are therefore likely to do nothing and make less profit on each sale of an imported item
Example of calculating differences in currencies
Q. How much will it cost a French business to buy goods from a British business which costs £400000 if £1=€1.25?
A. £400000 x 1.25= £500000
Q. How much will it cost a British business in pounds to buy $300000 of goods from a US business if £1=$1.50
300000/1.50= £200000
Tips for answering exchange rate math questions
when the money signs are different (£ €) you TIMES BUT if the money signs are the same (£ £) you DIVIDE
SPICED WPIDEC
Strong Pound Imports Cheaper Exports Dearer
Weak Pound Imports Dearer Exports Cheaper
Effects to a British exporter to the EU if the pound appreciates in value
makes them less competitive- costs American businesses more to buy our goods- gonna buy less from us
Effects to a British importer if the pound depreciates in value
makes them less competitive- weaker pound means we can buy fewer dollars
Effects to a British importer if the pound appreciates in value
makes them more competitive- imports are cheaper because our pound is stronger
Effects to a British exporter to the US if the pound depreciates in value
makes them more competitive- Americans want to buy from us because their currency is stronger compared to ours
Effective strategies for business to make them more competitive
if the pound appreciates in value, they should buy domestically e.g. Instead of buying oranges form Spain, buy from England- cheaper to import goods
REMEMBER…
a fall in the rate of inflation is not the same as a fall in prices, which is known as
deflation.
Deflation is usually associated with a fall in demand- when prices are falling, consumers may delay spending because they think they can make purchases in the future at lower prices. For a fall in prices, inflation needs to be a negative number. Deflation is rare in the UK.
The consumer price index
Inflation is measured by the consumer price index- which is produced by the government each month
- it uses index numbers to track changes in the average cost of a “basket” of around 700 goods and services that an average household would regularly buy. This relates back to the starting time of the index, the base year which is given in index numbers of 100.
