section 6 Flashcards
gross domestic product
total value of output and services in a country in one year
stages in a business cycle
growth
boom
recession
slump
recession
when there is a period of falling gdp
growth
when GDP is rising, unemployment is falling and there are higher living standards in the country. Businesses will look to expand and produce more and will earn high profits.
Boom
when GDP is at its highest and there is too much spending, causing inflation to rapidly rise. Business costs will rise and firms will become worried about how they are going to stay profitable in the near future.
Slump
when GDP is so low that prices start to fall (deflation) and unemployment will reach very high levels. Many businesses will close down as they cannot survive the very low demand level. The economy will suffer.
inflation
increase in the average price level of goods and services over time
unemployment
exists when people who are willing and able to work cannot find a job
economic growth
when a country gdp increases - more goods and services are produced than in the previous year
balance of payments
difference between a country exports and imports
real income
the value of income and it falls when prices rise faster than money income
Effects of reducing GDP (recession)
As output falls, fewer workers will be needed by firms, so unemployment will rise
As goods and services that can be consumed by the people falls, the standard of living in the economy will also fall
Effects of high inflation
As cost of living will have risen and peoples’ real incomes (the value of income) will have fallen (when prices increase and incomes haven’t, the income will buy lesser goods and services- the purchasing power will fall).
Prices of domestic goods will rise as opposed to foreign goods in the market. The country’s exports will become less competitive in the international market. Domestic workers may lose their jobs if their products and firms don’t do well.
When prices rise, demand will fall and all costs will rise (as wages, material costs, overheads will all rise)- causing profits to fall. Thus, they will be unwilling to expand and produce more in the future.
The living standards (quality of life) in the country may fall when costs of living rise.
Effects of high unemployment
Unemployed people do not produce anything and so, the total output/GDP in the country will fall. This will in turn, lead to a fall in economic growth.
Unemployed people receive no incomes, thus income inequality can rise in the economy and living standards will fall. It also means that businesses will face low demand due to low incomes
.
The government pays out unemployment benefits to the unemployed and this will rise during high unemployment and government will not enough money left over to spend on other services like education and health.
Effect of a disequilibrium in the balance of payments
If the imports of a country exceed its exports, it will cause depreciation in the exchange rate
If the exports exceed the imports it indicates that the country is selling more goods than it is consuming - the country itself doesn’t benefit from any high output consumption.
Effects of poor income equality
Inequal distribution of goods and services- the poor cannot buy as many goods as the rich- poor living standards will arise.
Fiscal policy
any change by the government in tax rates or public sector spending
exports
goods and services sold from one country to other countries
imports
goods and services bough in by one country from other countries
exchange rate
price currency in terms of another
exchange rate depreciation
the fall in the value of a currency compared with other currencies
direct taxes
paid directly from incomes
ex. income tax
indirect taxes
added to the prices of goods and taxpayers pay the tax as they purchase the goods
ex. vat
disposable income
level of income a taxpayer has after paying income tax
import tariff
tax on an imported product
import quota
physical limit on the quantity of a product that can be imported
Increasing government spending and reducing taxes
more production
increase employment
driving up GDP growth
This is because government spending creates employment and increases economic activity in the economy and lower taxes means people have more money to consume and firms have to pay lesser tax on their profits
Increasing interest rates bad results
will discourage investments and consumption, causing employment and GDP to fall (as the cost of borrowing-interest on loans – has increased, and people prefer to earn more interest by saving rather than spend)
increase in the rate of cooperation tax affect the business
Businesses would have to lower profit after tax. Managers will therefore have less money or finance to put back into the Business. the business will find it harder to expand.
Low profit after tax is also bad news for the owners of the business. there will be less money to pay back to the owners who originally invested in the business.
Government economic objectives (list)
- low inflation
- low unemployment
- economic growth
- balance of payments between imports and exports.
If the value of a country’s imports is greater than the value of its exports
it has a balance of payments deficit
problems if there was a balance of payments deficit
- The country could ‘run out’ of foreign currencies and it may have to borrow from abroad.
- The price of the country’s currency against other currencies – the exchange rate – will be likely to fall. This is called exchange rate depreciation.
How would businesses be affected by an increase in an indirect tax?
- Prices of goods in the shops would rise. Consumers may buy fewer items as a result. This will reduce the demand for products made by businesses.
- As prices rise so the workers employed by a business will notice that their wages buy less in the shops. Businesses may be under pressure to raise wages, which will force up the costs of making products.
How would businesses in a country be affected if the government put tariffs on imports into the country?
- Businesses will benefit if they are competing with imported goods. These will now become more expensive, leading to an increase in sales of home-produced goods.
- Businesses will have higher costs if they have to import raw materials or components for their own factories. These will now be more expensive.
- Other countries may now take the same action and introduce import tariffs too. This is called retaliation. A business trying to export to these countries will probably sell fewer goods than before.
Monetary policy
is a change in interest rates by the government or central bank, for example, the European Central Bank.
Exchange rate appreciation
is the rise in the value of a currency compared with other currencies.
Supply side policies
try to increase the competitiveness of industries in an economy against those from other countries. Policies to make the economy more efficient.
main effects of higher interest rates
Firms with existing variable interest loans may have to pay more in interest to the banks. This will reduce their profits. Lower profits mean less is available to distribute to the owners and less is retained for business expansion.
- Managers thinking about borrowing money to expand their business may delay their decision. New investment in business activity will be reduced. Fewer new factories and offices will be built. Entrepreneurs hoping to start a new business may not now be able to afford to borrow the capital needed.
Higher interest rates in one country will encourage foreign banks and individuals to deposit their capital in that country. They will be able to earn higher rates of interest on their capital. By switching their money into this country’s currency they are increasing the demand for it. The exchange rate will rise
Privatisation
selling government organizations to private individuals- this will increase efficiency and productivity that increase supply as well encourage competitors to enter and further increase supply.
Increased competition: by acting against monopolies and reducing government rules and regulations, the competitive environment can be improved and thus become more productive.
Improve training and education
governments plan to improve the skills of the country’s workers. This is particularly important in those industries such as computer software which are often very short of skilled staff.
increase competition in all industries
this may be done by reducing government controls over industry or by acting against monopolies.
changes in employment levels effects
affect the ability of the business to recruit new employees and also the incomes of customers.
if unemployment goes up then it may be easier to recruit employees as there are more people to choose from.
changes in economic indicators
business costs increasing
prices of products may rise resulting in loss of customers for businesses
rapid inflation effect
Workers wages will not buy as many goods as before - real incomes will fall
Prices of the goods produced in the country will be higher than those in other countries - people may by foreign goods instead
Jobs in countries will be lost
Effect of low unemployment
Unemployed people do not produce any goods or services. the total level of output in the country will be lower than it could be
The government pays unemployment benefits to those without jobs - a high level of unemployment will cost the government a great deal of money
Effect of no economic growth
As output is falling fewer workers are needed and unemployment will occur
the average standard of living of the population will decline - most people will become poorer
Business owners will not expand the business as people will have less money to spend on the products they make
value of a country imports greater than exports / balance of payments deficient
The country could run out of foreign currencies and it may have to borrow from abroad
The exchange rate will be likely to fall the currency will now buy less abroad than it did before depreciation
Effect in increase in the rate of cooperation tax to business
Business would have lower profit after tax
managers will therefore have less money or finance to put back into the business
the business will find it more difficult to expand
low profit after tax is also bad news for the owners of the business- there will be less money to pay back to the owners who originally invested in the business
Effect by an increase in indirect tax to business
Prices of goods in the shops would rise. consumers may buy fewer items. as a result this will reduce the demand for products made by businesses
Prices for necessary items will increase where as prices for unnecessary items will decrease
Employee workers would want more wages as the current way just might not be enough to buy necessary goods or services
Effect to business if government put tariffs on imports into the country
Businesses will benefit India competing with imported goods. this will now become more expensive leading to an increase of Home produced goods
Businesses will have higher cost if they have to import raw material of components for their own factory. is this will now be more expensive
Social responsibility
is when a business decision benefits stakeholders other than shareholders i.e. workers, community, suppliers, banks etc.
environmental issues
Businesses can pollute the air by releasing smoke and poisonous gases, pollute water bodies around it by releasing waste and chemicals into them, and damage the natural beauty of a place and so on.
WHY BUSINESSES WANT TO BE ENVIRONMENT- FRIENDLY
Sense of social responsibility that comes from the fact that their activities are contributing to global warming and pollution
Using up scarce non-renewable resources will raise their prices in the future, so businesses won’t use them now
Consumers are becoming socially-aware and are willing to buy only environment friendly products.
WHY BUSINESSES DO NOT WANT TO BE ENVIRONMENT-FRIENDLY
It is expensive to reduce and recycle waste for the business. It means that expensive machinery and skilled labour will be required by the business – reducing profits.
Firms will have to increase prices to compensate for the expensive environment-friendly methods used in production- higher prices mean lower demand.
High prices can make firms less competitive in the market and they could lose sales
Global warming
Is a gradual increase in the overall temperature of the earth’s atmosphere generally thought to be caused by increased level of carbon dioxide and other pollutants in the atmosphere
Pressure group
Is made up of people who want to change business or government decisions by taking action such as organising consumer boycott
Private Costs
costs paid for by the business for an activity.
Examples: costs of building the factory, hiring extra employees, purchasing new machinery, running a production unit etc.
Private Benefits
gains for the business resulting from an activity.
Example: the extra money made from the sale of the produced goods etc.
External Costs
costs paid for by the rest of the society (other than the business) as a result of the business’ activity.
Examples: machinery noise, air pollution that leads to health problems among near residents, loss of land
External Benefits
gains enjoyed by the rest of the society as a result of a business activity
Social Costs formula
Private Costs + External Costs
Social Benefits formula
Private Benefits + External Benefits
Sustainable development
is development that does not put at risk the living standards of future generations. It means trying to achieve economic growth in a way that does not harm future generations.
Few examples of a sustainable development
using renewable energy- so that resources are conserved for the future
recycle waste
use fewer resources
develop new environment-friendly products and processes- reduce health and climatic problems for future generations
consumer boycotts
If a business is seen to behave in a socially irresponsible way, they can conduct consumer boycotts (encourage consumers to stop buying their products) and take other actions.
why are pressure groups often powerful
They are often very powerful because they have public support and media coverage and are well-financed and equipped by the public. If a pressure group is powerful it can result in a bad reputation for the business that can affect it in future endeavours, so the business will give in to the pressure groups’ demands.
Ethical decisions
are based on a moral code. It means ‘doing the right thing’. Businesses could be faced with decisions regarding, for example, employment of children, taking or offering bribes, associate with people/organisations with a bad reputation etc. In these cases, even if they are legal, they need to take a decision that they feel is right.
effect of taking an ethical decision
Taking ethical/’right’ decisions can make the business’ products popular among customers, encourage the government to favour them in any future disputes/demands and avoid pressure group threats. However, these can end up being expensive as the business will lose out on using cheaper unethical opportunities.
Globalization
is a term used to describe the increases in worldwide trade and movement of people and capital between countries. The same goods and services are sold across the globe; workers are finding it easier to find work by going abroad for work; money is sent from and to countries everywhere.
Some reasons how globalization has occurred are:
Increasing number of free trade agreements
Improved and cheaper transport (water, land, air) and communications (internet) infrastructure
Developing and emerging countries such as China and India are becoming rapidly industrialised and so can export large volumes of goods and services.
This has caused an increase in the output and opportunities in international trade, allowing for globalisation
Advantages of globalisation for business
Allows businesses to start selling in new foreign markets, increasing sales and profits
Can open factories and production units in other countries, possibly at a cheaper rate (cheaper materials and labour can be available in other countries)
Import products from other countries and sell it to customers in the domestic market- this could be more profitable and producing and selling the good themselves
Import materials and components for production from foreign countries at a cheaper rate.
Disadvantages of globalisation
Increasing imports into country from foreign competitors- now that foreign firms can compete in other countries, it puts up much competition for domestic firms.
- If these domestic firms cannot compete with the foreign goods’ cheap prices and high quality, they may be forced to close down operations.
Increasing investment by multinationals in home country- this could further add to competition in the domestic market
Employees may leave domestic firms if they don’t pay as well as the foreign multinationals in the country- businesses will have to increase pay and conditions to recruit and retain employees.
free trade agreements
these are agreements between countries that allows them to import and export goods and services with no tariffs or quotas.
Protectionism
refers to when governments protect domestic firms from foreign competition using trade barriers such as tariffs and quotas; i.e. the opposite of free trade.
Import quota
Is a restriction on the quantity of goods that can be imported into the country.
Tariffs
are taxes on goods when they enter the country
effect of Imposing tariffs and quotas
reduce the number of foreign goods in the domestic market and make them expensive to buy, respectively.
will reduce the competitiveness of the foreign goods and make it easy for domestic firms to produce and sell their goods.
reduces free trade and globalisation.
Multinational businesses
are firms with operations (production/service) in more than one country. Also known as transnational businesses.
Why do firms become multinationals?
To produce goods with lower costs– cheaper material and labour may be available in other countries
-To extract raw materials for production, available in a few other countries.
-To produce goods nearer to the markets to avoid transport costs.
-To avoid trade barriers on imports. If they produce the goods in foreign countries, the firms will not have to pay import tariffs or be faced with a quota restriction
-To expand into different markets and spread their risks
Advantages to a country of a multinational setting up in their country
More jobs created by multinationals
Increases GDP of the country
The technology that the multinational brings in can bring in new ideas and methods into the country
As more goods are being produced in the country, the imports will be reduced and some output can even be exported
Multinationals will also pay taxes, thereby increasing the government’s tax revenue
More product choice for consumers
Disadvantages to a country of a multinational setting up in their country
The more skilled jobs will be done by workers that come from the firm’s home country.
The unskilled workers may also be exploited with very low wages and unhygienic working conditions.
local firms may be forced out of business- competition
can use up the scarce, non-renewable resources in the country
profits earned could be sent back to their home country and the government will not be able to levy tax on it.
can influence the government and economy
exchange rate
is the price of one currency in terms of another currency
currency appreciation
when the currencies value rises
effects of currency appreciation
imports become cheaper
exports become expensive
currency depreciation
when its value falls
currency depreciation effects
exports become cheaper
Imports become more expensive
