Theme 2 - External influences Flashcards
What is economic influence?
Economic influence = when a business is impacted in any way by economic factors e.g inflation, exchange rates
What is the economy?
The economy = the state of a country or region in terms of the production and consumption of goods and services and the supply of money
What is inflation?
Inflation = an overall increase in the price of goods and services within an economy
The annual rate of inflation shows how much higher or lower prices are compared with the same month a year earlier and it indicates changes to our cost of living
What is demand pull flation?
Demand pull flation = When there is too much demand more than the economy can supply
- Occurs when theres an increase in disposable income and people buy more goods and businesses can supply qiocker so they increase their prices
This can make profit magrins go up
What is cost push inlfation?
Cost push inflation = when rising costs push up prices
+Employee wage rises can make prices go up
-This can make profit margins go down if the business devides not to push up their prices
What is the rate of inlfation?
The rate of inflation = The percentage change in the price of goods and services within an economy in one year compared to the previous year
What are the expectations of inflation?
Expectations of inflations can make inlfation worse
* Can lead to a wage price spiral as businesses are expecting suppliers to put up their prices this results in people demanding higher wages which further puts up costs wages go up in increase od demand and this is a big cause of cost plus inflation
What is deflation?
Deflation = an overall decrease in the prices of goods and services within an economy
- Is the opposte of inflationas there is not enough demand so businesses reduce their prices
- Deflation causes a fall in productivity because businesses wont keep endlessly supplying the makret with goods nobody wants deflation leads to a rise in unemployment
What is consumer price index?
Consumer price index ( cpi) = can be used also as a measure of inflation in a country, it looks at the pricrd of hundreds of things we spend money on and tracks how the prices have change over time
The inflation rates are expressed as %
Movements in cpi represent changing costs
What is consumer price inflation?
Customer price inflation = the rate at which the prices of goods and services bought by households rises and falls
What are interest rates?
Interest rates = the cost of borrowing money
- the bank of England is responsible for deciding interest rate
- The BOE will raise interest rates 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
What will a business do if interest rates are low on a loan
Consumers may borrow money to buy a car, sofa, holiday etc
This will stimulate demand for these products
What will a business do if interests rates go up?
Consumers will borrow less money and will save instead of spending
This is bad news for businesses that sell products and services that are heavily financed
How do changes in interest rate affect a business?
- If interest rates rise the cost of borrowing will rise and this will mean that the cost of supplies for a business may increase
- A fall in interest rates means that cost of lending falls which may lead to an increase in profits (costs) less to borrow so less to pay back
What are exchange rates?
Exchange rate = the value of one currency in the terms of another currency. Currencies can change in value and this is due to the demand and supply of the currency
- When the pound is strong UK businesses that import from abroad will have a cheaper costs
- When the pound is strong businesses will find it harder to export UK made goods and services abroad as they will appear more expensive to other countries
What is the appreciation of the pound ?
Appreciation= that there is a rise in the pound against other currencies means that £ can buy more foreign currency
This can also be called a high / strong value of the pound
Strong pound means that imports will be cheaper and exports will be dearer
What does SPICED stand for?
SPICED = Strong Pound Imports Cheaper Exports Dearer
What is depreciation ?
Depreciation= a fall in the £ currency E.g. the uk decision to leave EU meant that £ fell sharply against other countries
- This means that the pound can buy less of other currecnies
What does WPIDEC stand for?
WPIDEC = Weak Pound Imports Dearer Exports Cheaper
How do u convert exchange rates?
To convert from single unit currency to another you need to multiply it by the exchange rate
What is economic growth?
The rise in output of an economy as measured by the growth in GDP usually as a percentage
What is taxation?
The charges made by government on the activities, earnings and income of businesses and individuals
- The uk government requires its citizens and businesses to pay a variety of taxes
What is income tax?
Income tax = taxes individuals pay on their incomes
- High tax rates reduces consumer disposable income so tend to spend less
This is bad for businesses as its likley to reduce their turnover - Lower tax rates encourage people to spend so businesses make bigger profits
What are the effects of high tax on UK businesses?
- Businesses will have higher costs which makes them less competitive in a global marketplace
- This may lead to unemployment rates rising as businesses have to lay off extra stuff due to reduction in demand
What are different businesses taxed on?
-Sole traders and partnerships pay income tax and limited companies pay cooperation tax
What are direct taxes?
Direct taxation is a type of tax which is paid for by an individual directly to the government. It includes poll tax, land tax or income tax.
