Theme 2 - 2.5.1 - Economic Influences

Question 1

What is Economic Influence ?

Answer 1

Economic influence i when a business is affected in any way by economic factors e.g. inflation, exchange rate etc.

Question 2

What is inflation ?

Answer 2

It is the rate at which products/services increase or decrease in price over a certain period of time

Question 3

What is CPI ?

Answer 3

CPI is the Consumer Price Index

CPI looks at the prices of hundreds of things we commonly spend money on - including bread, cinema tickets etc - and it tracks how these prices have changed over time

Inflation rates are expressed as percentages - if CPI is 4% this means that on average, the price of products and services we buy is 3% higher than last year

Think about the CPI as a shopping basket - the stuff a household buys they put in the shopping bag and as the different items increase/decrease in price - the basket overall decreases and increases in price

Question 4

What is inflation measured by ?

Answer 4

Consumer Price Index

Question 5

How is a business affected by changes in inflation ?

Answer 5

As inflation rises so does the cost of products and services

Cost of supplies, ingredients and raw materials will go up

As costs go up due to inflation - business owners may need to increase their prices to maintain

Profit margins will be squeezed

Question 6

What are exchange rates ?

Answer 6

The exchange rate is the price of one currency in exchange for another

Question 7

What is appreciation in exchange rates ?

Answer 7

Appreciation means that there is a rise in the pound against other currencies - means the pound can buy MORE foreign currency

This may also be called a high value or strong value of the pound

Question 8

What does strong pound mean ?

Answer 8

Strong pound means that imports will be cheaper exports will be dearer

Question 9

What is depreciation in exchange rates ?

Answer 9

A fall in pound is called depreciation

UK decision to leave the EU meant that the pound fell sharply with other currencies

This is bad news for the UK tourists as their money will be worth less abroad

This will have a negative impact on the UK businesses that import goods and services

Question 10

Why will imports be cheaper is there is a strong pound ?

Answer 10

When the pound is strong UK businesses that import from abroad will have cheaper costs e.g. a restaurant that imports Italian wine will have lower import costs

When the pound is strong then businesses will find it harder to export UK made goods abroad as they will appear more expensive to other countries

Question 11

What is SPICED ?

Answer 11

Strong
Pound
Imports
Cheaper
Exports
Dearer

Question 12

What’s the opposite of SPICED ?

Answer 12

Weak
Pound
Imports
Dearer
Exports
Cheaper

Question 13

What are interest rates ?

Answer 13

Interest rates means the cost of borrowing money

Question 14

What is the Bank of England responsible for ?

Answer 14

The Bank of England is responsible for deciding what the interest rate should be in the UK

If the Bank of England pushes up interest rates - consumer and business spending will fall

The Bank of England will raise interest rates if inflation is high and lower them if inflation is not a problem within the economy

Lower interest rates encourage economic growth and a fall in unemployment

Question 15

What does it mean when interest rates on a loan are low ?

Answer 15

If the interest rates on a loan are low then consumers may borrow money to buy - a car, sofa, holiday etc - this will stimulate demand for these products and services

Question 16

What happens if interest rates on a loan go up ?

Answer 16

If interest rates go up then consumers will not borrow and so will save instead of spending, this is
bad news for UK businesses that sell products and services that are heavily financed e.g. cars

Question 17

What does a rise in interest rates mean for a business ?

Answer 17

If interest rates rise then the cost of borrowing will rise and this will mean that the cost of supplies for a business may increase - as they might buy supplies on credit etc

Question 18

What does a fall in interest rates mean for a business ?

Answer 18

A fall in interest rates means that the cost of lending falls which may lead to an increase in profits (costs less to borrow so less to pay back)

Question 19

What is taxation ?

Answer 19

The UK government requires its citizens and businesses to pay a variety of taxes

These taxes are used to pay for; education in state schools, the armed forces, the 999 emergency
services, the NHS and local councils to name a few

Question 20

What happens if taxation increases ?

Answer 20

If taxation increases then the costs of a business will also increase, which will reduce profitability

Question 21

What does lower taxes mean for a business ?

Answer 21

Lower taxes can result in more demand in the economy ( means that more people have more money and therefore they can buy more stuff as they pay less tax so the demand for the products increases ) and lead to higher output and employment - as you have more money to pay you employees

Question 22

How do high taxes effect effect a business ?

Answer 22

If taxes are high then UK business will have higher costs - this makes them less competitive in a global marketplace - it may also mean unemployment rates may rise as businesses have to lay off extra staff due to the reduction in demand

Question 23

What happens if the % VAT goes up in a business ?

Answer 23

If the % of VAT goes up, a business could pass this cost on to the consumer so it makes goods more expensive to buy, or absorb the cost which will have an impact on their profit margin

Question 24

What does reducing VAT on some items do for the business ?

Answer 24

Reducing VAT on some items can stimulate demand

Question 25

What are the UK taxes that small businesses ( sole traders ) must pay ?

Answer 25

1. Income tax: taken off an employee’s or business owners’ salary.
2. VAT (only if they earn above £82,000) added to goods and services. A rise in VAT increases prices.
3. Business rates (but not if they work from home)
4. National insurance: contributions are payments made by both the employee and the employer. They pay for the cost of a state
   pension and the National Health Service. An increase in this tax raises a company’s costs and could result in inflation.

Question 26

What is the business cycle ?

Answer 26

It is the ups and downs of economy

The demand and output changes

Question 27

Whats another name for the business cycle ?

Answer 27

Trade cycle

Question 28

What is the boom phase of the business cycle ?

Answer 28

In the boom phase a country may enjoy a period of high consumer spending - good for the business as more sales

As more consumers are spending then there is a greater demand for goods and services

This increase in demand means an increase in work, increase in wages and lower unemployment

This means that more people are in work and are able to buy more stuff

Question 29

What is the recession phase of the business cycle ?

Answer 29

In times of recession - the country experiences a fall in demand

This means that consumers will demand less goods as they want to save their money rather than spend it - they don’t borrow money as they are scared that interest rates will go up

This means businesses will have to make redundancies ( sack people because their job wouldn’t be important to the business any longer ) to lower costs and they will also have lower profits as demands fall

Question 30

What is the slump phase of the business cycle ?

Answer 30

• A slump is the bottom of the business cycle where consumer confidence and spending is at its
lowest
• There is usually very little investment in businesses and high levels of unemployment as demand for goods and services falls to its lowest level

Question 31

What is the recovery phase of the business cycle ?

Answer 31

• In the recovery phase of the cycle, demand levels for goods and services start to improve

• Unemployment will start to fall as businesses start to take on workers to meet new improving
levels of demand

• Consumer confidence starts to return and consumers start to buy larger items again