STEEPLE - economic factors Flashcards
what does steeple stand for?
social
technology
economic
environmental
political
legislation
ethical
what is GDP?
the total value of output produced in an economy in a year
how is the size of the economy measured?
by adding up the value of all goods or services produced in a year
define economic growth?
the annual percentage change in GDP
it only tells you the rate at which the economy is growing or shrinking
what can the government do to encourage economic growth?
- encourage investment in physical capital by offering subsidies or lowering taxation
- improve the quality of human capital by investing in education
- improve infrastructure through better transport links (investment in road, railways and airports increase the speed with which raw materials and finished products can be delivered, and help employees to get to work quicker)
what is inflation?
persistent general tendency of prices in the economy to rise
why do prices go up?
- cost of input
- shortage of supply
what do we categorise inflation into?
- cost push (increase in business costs leads to higher prices)
- demand pull (increase in demand puts prices up)
what are the impacts of inflation on a business?
- increased costs including materials and fuel
- lower profit margins
- reduced sales
- pay rise demands from employees
define exchange rates:
the value of one currency in terms of another
define strengthening exchange rate
if the pound increases in value it is said to strengthen
this means the pound will buy more of a foreign currency
define weakening exchange rate
if the pound decreases in value it is said to weaken. This means that the pound will buy less of a foreign currency
define import
a sale which leads to money going out of an economy
PRODUCT IN, MONEY OUT
define export
a sale which leads to money going into an economy
PRODUCT OUT, MONEY IN
what does SPICED stand for?
strong
pound
imports
cheap
exports
dear (expensive)
how can businesses respond to fluctuating exchange rates in the short term?
- do nothing, accept lower markup
- cut other costs - such as marketing
- employ more staff on zero-hour contracts
how can businesses respond to fluctuating exchange rates in the long term?
- switch suppliers
- increase prices
- focus on exports by selling to more European countries
who sets the exchange rates?
the exchange rate is set based on supply and demand for the currency
what factors affect demand for the pound?
- foreign investment in the UK
- Desire of foreign customers to buy UK exports
how does foreign investment in the UK affect demand for the pound?
a foreign business who wants to invest in the UK will have to exchange its currency to British pounds in order to operate in the UK
this increases the demand for the pound, as more businesses choose to operate in the UK
how does desire of foreign customers to buy UK exports affect the demand for the pound?
if people in a foreign country want to purchase something from the UK, they have to exchange their currency into pounds to buy it, this increases demand for the pound
define interest rates
reward for saving and the cost of borrowing expressed as a percentage of the money saved or borrowed
who sets interest rates?
Bank of England
More specifically, the 9 members of the Monetary Policy Committee
impact of low interest rates on a business
sales - increase due to people having more disposable income
existing borrowing - will become cheaper and the business can spend more
new loans - they will take out new ones as they only have to pay back less
impact of high interest rates on a business
sales - decrease due to people having less disposable income
existing borrowing - more expensive, so the business will spend less
new loans - won’t take out new loans as they have to pay back more
impact of low interest rates on a borrower
have to pay back less to the bank, so they will send more as they have increased disposable income
impact of high interest rates on a borrower
more to pay back on loans, so people will spend less as they have less disposable income
impact of low interest rates on savers
they will get less money from their savings, so they have less incentive to save, so they will spend more money
impact of high interest rates on savers
they will get more money from their savings, so they have more incentive to save, they will spend less and save more
if interest rates are high the pound is ______?
strong
why is the pound strong when interest rates are high?
because the pound is in high demand due to increased hot money, this means foreign investors have to exchange their currency into pounds, which shifts demand curve to the right for the pound, increase value of £
when interest rates are low the pound is ____?
weak
why is the pound weak when interest rates are low?
pound suffers decreased demand as people have to pay more of their currency when exchanging into pounds, also less hot money
define unemployment?
a situation in which people who are able and willing to find work aren’t able to find employment
why does the government want low levels of unemployment?
- waste of Human Resources (people working produce goods and services)
- bad for society (social problems and benefits cost money, which could be spent on other things)
- being employed leads to more tax revenue for the government as well as less welfare payments being paid
define balance of trade?
difference between the value of exports and imports
what happens when exports exceed imports and vice versa?
when exports exceed imports, there’s a balance of trade surplus
when imports exceed exports, there’s a balance of trade deficit
how to calculate balance of trade?
EXPORTS - IMPORTS = BoT
how can imports be decreased and exports be increased (leading to surplus)?
- low/stable inflation (increases interest rates - may be used to manipulate)
- weak pound (decreases imports and increases exports)
- good quality / unique products
- encourage starts-ups (export potential)
- subsidies (lower prices of goods)
- promote passport to export programme
what are indirect taxes?
taxes on expenditure/spending. They’re paid to tax authorities by consumers indirectly by the suppliers of the goods/services
what are direct taxes?
these are taxes on income and profits, paid directly by the government by the bearer to the tax authorities
who is the tax authority in the UK?
HMRC - His Majesty’s Revenue Customs
what is income tax?
a tax taken out of a person’s income (people who earn higher wages pay a higher income tax)
what is national insurance tax?
taken as a contribution towards the state pension and treatment under the NHS (employer also contributes)
what is VAT?
value added tax
it is added to a product or service bought by a customer. The business then pays the VAT to HMRC
how can a business benefit from VAT?
they can claim back VAT on products purchased on business expenditure (usually 20%)
what is corporation tax?
a tax on the profits made by companies (PLCs and Ltds)
what is tax on products sometimes referred to?
duties or excises
why are some goods taxed?
e.g., cigarettes, cheap alcohol and tobacco
they are taxed because they have negative externalities
and the gov can also raise tax revenue from inelastic goods/services
what is stamp duty?
a tax levied on the purchase of property or land
why is stamp duty used by the government?
to influence demand in the property market
High stamp duty lowers demand and vice versa
what types of tax are indirect?
VAT, tobacco/alcohol/petrol tax, stamp duty
what types of tax are direct?
National insurance, corporation tax, income tax
what is the purpose of taxation?
- taxation raises large amounts of revenue for the governments to spend on public services such as education and healthcare
- to control economic activity
- to influence expenditure on certain times
what is the purpose of government expenditure?
- health
- transport
- education
why is health funded by the government?
if more people can get treatment they won’t be unable to work, so they can benefit the host country’s GDP
why is transport funded by the government?
if transport infrastructure is good, then raw materials can be transported easier, boosting GDP
why is education funded by the government?
if more children receive a better education, they can develop better skills in order to boost GDP by working
what is a subsidy?
payment from the government to a business / individual
what are some examples of UK subsidies?
- renewable energy
- export and imports
- employment
- tax
what are the benefits of subsidies?
- keep prices lower so they can remain affordable
- offset production and keeps inflation to a minimum
- they maintain vital industries (keep them in business)
- can increase the supply of goods as they reduce how much it costs a business to manufacture them (influences demand)
why can subsidies lower prices?
they don’t have to be paid back, so the company who received the subsidy can shift their lower costs onto the customers with lower prices
why can subsidies boost demand?
they can do this during recessions, for example they may offer people money to spend in exchange for something
what is fiscal policy? (demand)
economic policy used to influence the level of spending in an economy. It is conducted by the government through taxation and public spending
what does fiscal policy affect?
the level of demand in an economy
what will increased tax lead to?
generally less spending and vice versa
what can government spending influence?
the level of demand
what is the multiplier effect?
(this won’t be examined but is good to know alongside fiscal policy)
the effect of changes in economic activity in one sector on other sectors, if one business experiences a rise/fall in demand this will have a knock on effect on businesses/organisations supplying it
what is monetary policy? (demand)
manipulation of the level of demand in the economy using the rate of interest. Controlled by the monetary policy committee (Bank of England)
what will an increase in interest rates lead to? (monetary policy)
decreased spending and vice versa
how long does a change in interest rate usually take to effect people?
18 months
what is a supply-side policy?
aim to improve the economy’s overall productive capacity
what are supply side policies intended to do?
increase the output of an economy
what are some examples of supply side policies?
- improving employee skills
- cutting corporation tax
- reducing welfare benefits
what will supply side policies lead to?
an economy where employees are skilled and incentivised to work and businesses are able to invest
what is the business cycle?
rises and falls in economic activity. These follow a pattern which can be identified as boom, recession, recovery and slump
what can a recession lead to?
(normal vs inferior goods)
decrease in demand of normal goods, however in some cases it will lead to increased demand of inferior goods as they are cheaper alternatives
why is there less investment during a recession?
- less finance
- lower return on investment
- precaution
how can businesses respond during a recession?
- redundancies
- increased/decreased promotional activity
- cutbacks on production
- less stock holding
how can the bank of England encourage spending?
MPC can lower interest rates
what does more confidence lead to during a boom?
higher investment as people know they can get a return on the investment
what do high employment levels lead to?
higher / increased spending because more people have disposable income to spend
what is inflation like during a boom?
might be above target during a boom because people are spending more, which causes demand to increase which means people can raise prices, leading to high inflation
the government can increase tax or MPC can increase interest rates to promote saving rather than spending
what happens to business premises during a recession?
land may be cheaper, if a business has retained profits, they may use it to buy land as it’s cheaper
the business can offer a lower price and it will be accepted
then when there’s a boom the land will be worth more
what happens to asset purchases during a recession?
assets may become cheaper, so businesses can buy more if they have retained profits
what happens to staff during a recession?
higher levels of unemployment, this means there is more demand for jobs so the business can find staff easier
this means the business can offer lower wages and people will accept them because they just need a job
what happens to products on sale during a recession?
during a recession, businesses may change the products offered in order to lower prices, but still increase markup by getting supplies from cheaper places
what happens to share purchases during a recession?
during a recession, share prices are lower (due to lack of sales)
businesses/investors may buy shares when they’re price is low and sell them for much more once the economy is recovering or in boom (make profit on original share)
describe a boom
confidence: optimistic
spending: high
income: high
unemployment: skill shortage
inflation: high
investment: high
describe a recession
confidence: pessimistic/falling
spending: falling
income: falling
unemployment: starting to rise
inflation: stable
investment: limited to essential
describe a slump
confidence: pessimistic
spending: low
income: low
unemployment: skill surplus
inflation: deflation
investment: plans cancelled
describe a recovery
confidence: optimistic/rising
spending: higher
income: slowly increasing
unemployment: slowly falling
inflation: slight rises
investment: increasing
