PEST - Economic

Question 1

What is Economic Growth

Answer 1

UK economic growth is measured using gross domestic product (GDP) which looks at the value of goods and services produced in the UK economy over one year.

Real GDP takes into account the rate of growth in the size of the UK economy taken into the account the effects of inflation.

Question 2

The business cycle

Answer 2

The business cycle is a measurement of economic growth over time. It has four distinct phases, boom recession, recovery and slump.

Question 3

Boom

Answer 3

A boom is characterised by period of very strong, economic growth and high levels of business and consumer confidence.

Firms are investing heavily to try and satisfy high levels of consumer demand, and this in turn create jobs and increases standards of living as unemployment levels are very low .

Booms risk the overheating of the economy as demand cannot ultimately be satisfied. There is a pressure on firms to raise wages as inflationary pressures build, and this adds to a firms cost.

Question 4

Businesses and economic booms

Answer 4

Shortage of skilled staff

Higher labour costs

Firms operate near full capacity

Question 5

Recession

Answer 5

A recession is two successive quarters of negative economic growth

Businesses and Recessions

Price sensitive consumers
Job security fears
Business failures

Question 6

Slump

Answer 6

A slump is technically a period of prolonged economic decline. Characterised by high levels of unemployment ,negative GDP, low business and consumer confidence and very limited investment.

It is similar to a recession, but it lasts longer than the effects are more profound.

Business strategies in recessions

Find new markets
Reduce selling prices
Cut costs

Question 7

Recovery

Answer 7

The recovery phase marks the first signs of economic growth returning

Any growth is very uncertain at this stage, and both businesses and consumer competence levels remain low, and they are sure that grateful continue and can be sustained .

Business and economic recovery
- rising levels of employment
- increased capacity utilisation
- gradual increase in investment

Question 8

What is inflation

Answer 8

Inflation is the general tendency for prices to rise

Inflation means an increase in the cost of living as the price of goods and services rise

Employees, seek higher wages to offset the increasing price. This adds to a firms cost and forces them to raise prices even higher which then results in additional calls for high wages.

Question 9

Government and inflation

Answer 9

Maintaining a low and stable rate of inflation is a key economic objective for the government.

The government set the Bank of England an inflation target (2%) that they need to meet using the tool of interest rates (monetary policy)

Question 10

Measurement of Inlflation

Answer 10

The main measure of inflation used in the UK is currently the Consumer Price Index (CPI)

The CPI looks at the average spending habits of UK consumers by examining the spending habits of a few thousand chosen households who keep a record of their spending over a two week period each month.

Each item is given a weighting depending on how important they are in the typical basket of goods.

Question 11

Causes of inflation

Answer 11

There are two main causes of inflation

Demand-Pull - occurs when there is too high a level of demand within the economy for goods and services. Businesses continually raise their prices in order to ration the supply.

Cost-Push - when the costs involved in the production of goods and services rise and this additional cost is then passed onto the consumer in the form of higher prices.

Question 12

Government and inflation

Answer 12

Cap public sector pay rises
Raise taxation to cut demand
Cut government spending
Encourage greater competition in markets
Lower the supply of pounds to raise its value.

Question 13

Deflation

Answer 13

Deflation is a general tendency for price levels of goods and services to fall over period of time.

Consumers might save their money instead of spending it because they see prices falling and expect this to continue. Are therefore waiting for the lowest price

Firms see a fall in demand and this leads to the need for further cost cuts and a decline in economic growth.

Question 14

Interest Rates

Answer 14

Interest rates can be expressed as the financial reward for the lending of money or the financial cost for the borrowing of money.

Question 15

Interest rates effects

Answer 15

Falling Interest Rates
- rising incomes
- increased spending
- higher investment
- lower unemployment
- depreciation of the £’s value

Rising interest rates
- falling incomes
- less spending
- lower investment
- higher unemployment
- appreciation of the £’s value

Question 16

Interest rates and exchange rates

Answer 16

Any rise in the UK’s interest rates will result in the Pound Sterling becoming more attractive to foreign investors on the currency exchange market.

Investors will receive a high rate of return for holding their money in pounds, and so demand for the pound will rise.

Question 17

Exchange rates

Answer 17

Exchange rate of the price of one currency expressed in terms of another.

When the value of the pound falls in relation to another currency, this is called depreciation .

Arising the demand will lead to a higher value for the pound. This rise is called appreciation.

Question 18

Exchange rates and business

Answer 18

Strong
Pound
Imports
Cheaper
Exports
Dearer

Question 19

Unemployment

Answer 19

Unemployment is a measurement of those people who are without a job but are willing and able to work.

Question 20

Types of unemployment

Answer 20

Frictional unemployment - occurs when people are in between jobs

I.e. in the short period of time between finishing one job and starting another.

Structural Unemployment- involves the collapse of an entire industry bringing with it the loss of many thousands of jobs.

Cyclical Unemployment - is linked to the different phases of the business cycle. As levels of demand rise and fall within an economy, so too does the demand for employees.

Seasonal Unemployment - when demand for labour is high during peak season by it drops to only essential staff when out-of season.

Question 21

Government and Employemnt

Answer 21

High Emplyment
Large number of claimants for benefits
Government have to use tax revenues to pay benefits
Less money available for other uses
social problems in area with recurring long-term unemployment problems
Tax revenue spend trying to attract business to area of high unemployment.