Theme 2.5: External Influences (Economic Centric) Flashcards
Inflation
A sustained increase in the average price level of the economy I.e there is a fall in the value of money. Best measure is a freddo, was 15p now 30p
How is inflation measured?
Using the consumer price index (CPI) which is a measure of how much the price of a wide range of goods changes, usually referred to as a basket of goods and services
Deflation
A sustained decrease in the average price level in the economy I.e there is rise in the value of money for example a Mars bar may have cost 60p in 2018 but 55p in 2019 except this would be on a much larger scale
How can inflation affect a business?
. Uncertainty in inflation can make business less likely to invest
. Profitability can be reduced due to rising costs of supplies and wages
. If inflation increases faster than foreign competitors then it may be harder to maintain competitiveness from rising costs
. Inflation can make loans easier to repay due to the reduction in the value of money
. Inflation makes the likes of credit and mortgages more difficult for consumers to pay off, this means they have less disposable income which can lower a businesses revenue
Exchange Rates
The value of one currency in relation to another e.g £1 could be worth $1.60. This can change over time
Depreciation
The values of one currency against another goes down
Appreciation
The value of one currency against another goes up
What happens when the pound appreciates?
. Exports become more expensive as foreign countries have to give up more of their money for the same number of pounds.
. Imports become cheaper because you can buy more foreign currency for the same amount of pounds, leading to increased profitability
What happens when the pound depreciates?
. Exports become cheaper because foreign countries can spend less of their currency on the same amount of pounds.
. Imports become more expensive because you have to spend more pounds on the same amount of a foreign currency.
What does SPICED stand for?
Strong Pound Imports Cheap Exports Dear
Interest rate
The price of borrowed money. Charged when taking out a loan and payed when saving money in savings
Impact of an increase in interest rates on a business
. Businesses are less likely to borrow and expand
. Slower growth due to less expansion and less start ups due to less incentive to borrow
. Consumers are less likely to borrow for bigger items such as holidays and cars etc this means spending may fall
. Mortgage repayments increase meaning people will have less disposable income
. As a result of the impact on customers, many business will face falling demand on their goods and services
Impact of a decrease in interest rates on a business
. Investment may increase as loans are cheaper so businesses may expand
. Since the cost of loans are low there may be more business start ups
. Consumer spending increases as the likes of credit cards and loans are cheaper and the consumer has more disposable income
. Many businesses will see a rise in demand for goods and services due to the impact on consumers
Direct Taxation
Taxes charged on earnings that effects the levels of disposable income
Indirect Taxation
Taxes charged on things such as spending (VAT) and so on
Direct Taxation Examples
. Income Tax
. Corporation Tax
. National Insurance
. Corporation Tax
Indirect Tax Examples
. VAT - Value Added Tax . Exercise Duties - Sugar Tax, Smoking and alcohol charges . TV license . Car Tax . Road Tax . Bedroom Tax
How could a government cut to public spending effect a business?
. Some benefits gain sales directly from the government
. Large businesses that supply the government may face difficulties e.g Airbus supplies the army with Typhoon aircraft, a cut to the defence spending could have knock on implications
. Less people will be employed so the average income will be less so less money is spent plus luxury goods much less likely to be bought.
Public Spending Cuts simplified chain of events
Public Spending Cuts > Public Sector Redundancies > Lower Incomes > Less Spending > Less demand for consumer goods > Sales revenue falls
What is economic growth measured by?
The GDP of the country in question in terms of percentage change
What does GDP stand for?
Gross Domestic Produce
What does GDP Measure?
The total value of all goods and services produced within the economy over a period of time. Basically is the total income of an entire country
What does the business cycle refer to?
The fluctuations in the levels of growth or decline in the GDP over a period of time.
What is the business cycle also referred to as?
Trade Cycle and Economic Cycle
What is the long term trend of a business cycle?
The average change in the GDP over a certain period of time taking into account all economic stages of the business cycle
What is a ‘Boom’ in the economy?
A period of rapid growth and expansion in a coountry
What is a ‘Downturn’ in the economy?
A period where the boom slows and the rate of growth decreases
What is a ‘Recession’ in the economy?
When the GDP suffers negative growth for at least two consecutive quarters i.e lower output
What is a ‘Recovery’ in the economy
Growth in the economy returns, beginning slowly but increasing in pace
Name two ways a business may be affected by a ‘Boom’ in the economy
Positive:
. More businesses will start up and old businesses will be more likely to expand
. Sale of most goods and services will increase
. Unemployment is low and consumers have more money to spend.
. Consumers may switch to more luxury goods due to the rising incomes.
Negative:
. Prices may rise for materials due to excess demand
. Inflation may cause some businesses to struggle
. Shortage of skilled labour may mean costs go up as a result of having to increase wages, this can impact prices
Name two ways a business may be affected by a ‘Downturn’ in the economy
Positive:
. Inflation may ease
. Sellers of inferior goods are more likely to see an increase in revenue
Negative:
. Sales of most goods and services will be lower
. Unemployment will begin to rise, consumer spending is less
. Investment slows amongst the uncertainty
Name two ways a business may be affected by a ‘Recession’ in the economy
Positive:
. Rise in the sale of inferior goods
. Costs may fall due to over supply of materials
Negative:
. Sales of most goods and services are lower
. Unemployment is high so consumers have less money to spend.
. Investment will decrease
. Many businesses may fail under the pressure
. Production may have to be cut
. Supply may exceed demand drastically in some areas
Name two ways a business may be affected by a ‘Recovery’ in the economy
Positive:
. Sales revenue for many products and services will begin to rise
. Unemployment decreases, consumers have more money
. Investment increases due to higher confidence
Negative:
. Inflation may begin to return
. Tougher competition from those who survived the recession
What stage of the business cycle is the UK in now?
Recovery - Increases of lower than 0.5% per quarter on average
Economic Forecasting
The process of predicting future economic trends and events. Created through analysis by the likes of the bank of England and Office of Budget Responsibility
Contingency Plan
A ‘what if’ plan that allows solutions to how a business would be able to cope in a range of different circumstances such as a recession
Why is a contingency plan good?
Minimises the impact of an event and saves time when it comes to reacting to the scenario, giving them a competitive advantage over any ill prepared competitors
