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Business (Economic influences) > Revision > Flashcards

Revision Flashcards

1
Q

Definition of inflation

A

A sustained rise in the average price of goods within an economy.

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2
Q

What is the current rate of inflation?

A

1.8% but the government aims for it to be 2%.

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3
Q

What are the two measures of inflation in the UK?

A

– RPI(retail price index)– this includes housing price

– CPI (consumer price index) – used by rest of Europe.

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4
Q

What are the cost-push causes of inflation?

A

– Rising wages simulated by expectations of workforce.
– Rising taxes.
– Increasing cost of raw materials (influenced by weather regulations etc).

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5
Q

What are the demand-pull causes of inflation?

A

– Rise in consumer spending (stimulated by tax cuts or growth in economic activity).
– Increase in investment by firms.
– Rise in government spending.
– Increase in exports.

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6
Q

Does inflation matter?

What are the effects of high levels of inflation?

A

– UK firms get competitive.
– Causes uncertainty which means it’s harder to predict the future.
– Increases wage demands of workers which may lead to a wage price spiral.

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7
Q

What is the definition of deflation?

A

– Tendency towards a decline in the general price level.

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8
Q

What are the effects of deflation?

A

– It causes lower demand/lower costs.
– It causes uncertainty.
– Consumers reduce demand which means there is low investment which causes the deflation spiral.

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9
Q

What is a wage price spiral?

A

– When workers bid for higher wages as they find their real income have been a row did by rising prices.
– This can lead to cost push inflation and then demand for higher wages again causing further inflation.

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10
Q

What is uncertainty and lower investment?

A

-inflation changes make it harder for firms to predict costs and revenues and so they may be deterred from investment projects.

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11
Q

Why is there a falling competitiveness when inflation rises?

A
  • exports become relatively more expensive and imports become relatively cheaper.
  • The trade position will therefore deteriorate unless the exchange rate deteriorates to compensate.
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12
Q

What are Shoe-leather costs?

A

– When the opportunity cost of holding cash increases people will keep more money in interest-bearing account’s making more trips to the bank necessary.

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13
Q

Cost of inflation- income is redistributed as:

A

– Those on fixed incomes such as pensioners seem real incomes fall and the real value of their savings also fall.
-borrow his benefit as the real value of debt is eroded.

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14
Q

Definition of exchange rate

A

-an exchange rate is the price of one countries currency in relation to that of another.

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15
Q

What are the factors that affect the exchange rate?

A
  • Trade: the relative level of imports and exports.
  • Interest rates
  • Government intervention : can manipulate currency.
  • Speculation
  • Investment and Capital flows.
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16
Q

Affects of a depreciating pound:

A
  • Fall in pound improves UK export competitiveness.
  • A falling pound pushes import prices up, reducing their competitiveness.
  • makes imports more expensive and exports cheaper.
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17
Q

Affects of appreciation of the pound:

A
  • cheaper imports and more expensive exports.

- decreases competition for UK exports.

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18
Q

Business trade cycle:

A
  • Boom
  • Slowdown or economic slump
  • Recession
  • Recovery
  • GPD y axis
  • Time x axis
19
Q

Definition of the real interest rates.

A
  • Rate of interest an investor, saver or lender receives.

- Real income = rate of income after inflation = 2.4 - 1.8 = 0.6%

20
Q

What is a budget deficit?

A

-An indicator of financial health in which expenditures exceed revenue. Government tends to borrow.

21
Q

Why do low interest rates lead to higher company investment?

A
  • make it cheaper to borrow so it encourages businesses to invest.
  • reduces the incentive to save.
22
Q

Trade Cycle points:

A
  • In a recession, less people are likely to buy luxury’s such as organic food, going out to eat in expensive restaurants and products with high income elasticities. Demand is likely to decrease for them.
  • Necessities such a toilet paper, and certain foods will feel little impact as people will always buy them.
  • inferior goods will see a rise in demand as people ‘trade down’.
  • producers of luxury goods may have no choice but to cut costs and lower prices to survive unless they can adapt their products to the new economic environment.
  • growing unemployment.
23
Q

Business cycle definition:

A

-The sequence of recession, recovery, book and downturn which many economies go through.

24
Q

Definition of recession:

A

-involves 6 months or more of falling GDP. Often involves a general pessimistic business mood and falling level of demand and employment.

25
Q

Problems caused by Boom:

A
  • pressure on resources and competition for them tends to be higher.
  • costs are more likely to be rising.
  • Even though economies can be booming, industries can still decline and struggle to survive.
  • rapid GDP growth in a boom, often combined with high levels of employment and inflationary pressure.
26
Q

Definition of economic forecasting:

A

-Process of predicting future economic variable and events.

27
Q

Definition of contingency plan:

A

Plan devised for any possible unusual development. It’s not just about major events. About being ready for events such as inflation, exchange rate changes and any potential disruption unknown.

28
Q

Legislation definition:

A

-Passing laws that may set new rules that businesses must follow. Those rules are known as regulation.

29
Q

Consumer protection legislation:

A
  • stops firms from deliberately misleading people in their advertisements.
  • Gives consumers the right to their money back if a product is not ‘fit for purpose’
30
Q

Environmental protection laws:

A
  • forces firms to pay for waste that they are dumping into ‘landfill’
  • makes it a criminal offence to allow toxic wastes to leak into a nearby river.
31
Q

Competition law:

A
  • Makes it illegal for firms to get together to agree prices.
  • Allows any takeover to be checked out if the combined business has a market share of more than 25%
32
Q

Health and safety:

A
  • Forces firms to provide and pay for equipment necessary to keep an employee from injury or illness.
  • May slow a building firm down, if scaffolding has to be put up when a roof is being repaired.
33
Q

Definition of a slump:

A

-A slump is when there is poor performance within the economy and market over a prolonged period of time, sometimes referred to a recession.

34
Q

Definition of income tax:

A

When the government takes a percentage of income that people receive.

35
Q

Definition or cooperation tax:

A

-When the government takes a percentage of business profits. Currently 20%.

36
Q

Definition of interest rate:

A

-The charge for borrowing money, normally expressed as a percentage of the amount borrowed per year. Current rate is 0.25%.

37
Q

Definition of bang of England base rate:

A

-Used as a starting point in the setting of many interest rates.

38
Q

Affects of low interest rates:

A
  • any bank loans or overdrafts they take are likely to be relatively cheaper, reducing costs.
  • consumers can borrow cheaply to fund expensive purchases, so demand may rise for durable products such as cars.
  • lower mortgage interest gives many households more spending power so consumption might rise.
39
Q

Definition of floating currency:

A

-floating currency has its value set by market forces of demand and supply, so can fluctuate.

40
Q

Definition of appreciation and depreciation:

A
  • rise in value of currency against others

- fall in value of currency against others

41
Q

Equation of total profit:

A

Total revenue - total costs

42
Q

How to work out exchange rate

A

If £1 = €1.46

€51.10 = €51.10/ €1.46
= £35.00

43
Q

Calculation for price elasticity

A

Percentage Change in demand/ Percentage change in price.

If it not a minus then it’s inelastic

Business (Economic influences) (1 decks)

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