Unit 7 - Economic Change Flashcards
The economy
The state of a country/region in terms of the production and consumption of goods and services and the supply of money
Gross domestic product (GDP)
A measure of economic activity; the total value of a country’s output over a period of time usually in annually/ quarterly figures
The business cycle
The regular pattern of ups and downs in demand and output within an economy or GDP over time
Peak / boom
- GDP is growing fast
- unemployment is likely to be low and spending and disposable incomes high
- full capacity/ firms will increase their investment
Downturn/ recession
- The economy is slowing down
- unemployment rising
- consumer and investment spending slowing
- inflationary pressure falling
Slump
- rate of growth of GDP may be close to zero or negative
- unemployment high
- inflation low
- firms reluctant to invest and spare capacity
Recovery / expansion
- rate of growth of GDP picks up
- consumers start to regain confidence and spend more
- unemployment begins to fall
How to survive during a recession
- strong balance sheet
- sufficient liquidity
- low gearing
- diversify the product range
Strategic decisions of recovery
- discounts of promotions to capture market share
- partnerships / mergers
- capacity expansion
Functional decisions of recovery
- inventory management (meet sales and avoid excess stock)
- recruit new staff
- market research to capture emerging opportunities
Strategic decisions when in a BOOM
- enter new market to take advantage of high demand
- diversification
- increase facilities (warehouses)
- sponsorships
Functional decisions when in a boom
- automation investment to improve efficiency and reduce unit costs
- market segmentation ( target high growth customer segment with tailored messages and offers)
- training so staff an handle demand and technology
Strategic decisions when in a recession
- close underperforming facilities
- discount to stimulate demand
- incentives (loyalty programs)
- automation
Functional decisions when in a recession
- postponing non essential maintenance to conserve cash.
- reduce spending on advertising
- redundancies and halting new hires
Strategic decisions when in a slump
- simplify corporate structure to reduce costs
- debt restructuring
- focus on core
Functional decisions when in a slump
- seek financial help from the government
- tighten quality control
- shut down non essential functions and operations
- prioritise existing customers
- move to digital marketing to save costs
Implications of a recession for a firm selling inferior goods
- Opportunity due to increase in demand due to reduced incomes, therefore customers have less disposable income so increase revenues
- however may face pressure on its supply chain as suppliers are also dealing with recession so may have to renegotiate payment terms
- may need to increase production to meet rising demand
Implications of a recession for a firm selling luxury products
- significant drop in demand due to low consumer income so less disposable income so decrease revenues
- must maintain customer relationship e.g. price reductions
Why might a skills shortage occur during periods of economic growth?
- rapid expansion (demand can outpace the supply of qualified workers)
- growth accelerates technological innovation ( High demand for workers with tech skills)
- industries evolve so skill set required for job changes (workers with outdated skills)
- training programs outdated
- ageing workforce
UK economic objectives
- low unemployment
- steady growing GDP
- stable and low inflation
- balance of imports and exports
Fiscal policy
The use of taxation and government expenditure to influence the economy
Fiscal policy includes… (3)
- direct taxes
- indirect taxes
- government expenditure
Direct taxes
Taxes on incomes/profits
E.g. income tax, corporation tax, national insurance
Indirect taxes
Taxes on spending
E.g. VAT, excise duty, alcohol duty
Government expenditure
Often in the form of subsidies to support businesses that are importantly to the economy and that might otherwise fail, and to encourage business activity that would otherwise not take place
E.g. health, housing, education subsidies
Fiscal policy aims to…
- expand demand during a slump in the economy
- contract (increase taxation) demand during a boom in the economy
Effects of decrease in tax for businesses
- cutting indirect taxes reduces prices which may boost consumer spending (especially income elastic products)
- reduction in income tax increases consumer disposable income (good for luxury product)
- falling corporation tax promotes investment , output and economic activity
Effects of an increase in tax on businesses
- increased VAT increases prices which decreases demand
- producers may increase prices or absorb the indirect tax to avoid raising prices, both of which cuts profits and reduces investment
- less disposable income for customers