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A-Level Business > unit 7 economy test > Flashcards

unit 7 economy test Flashcards

1
Q

what is the business (economic) cycle

A
  • the level of demand in most markets is influenced by the rate of economic growth
  • economies vary in terms of their ‘normal’ long term growth. A mature economy like the UK has a long term growth rate of around 2-3%.
  • GDP growth will vary depending on the state of the economic cycle
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2
Q

what is a net importer

A

a country or territory whose value of imported goods and services is higher than its exported goods and services over a given period of time.

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3
Q

what is GDP

A

measure of the value of output (activity) in the economy

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4
Q

what is demand

A
  • how much of a good or service a consumer wants and is able to pay for
  • for a business, demand turns into revenues
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5
Q

what are the stages of the business cycle

A
  • the sequence of slump, recovery, boom and recession
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6
Q

what are the main causes of the business cycle

A
  • changes in the level of business and consumer confidence
  • alternating periods of stocking and de-stocking
  • changes in the value of consumer spending and business investment
  • changes in government policy which can induce a change in the economy
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7
Q

whats boom in the business cycle

A

high levels of consumer spending, business confidence, profits and investment. Prices and costs also tend to rise faster. Unemployment tends to be low

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8
Q

whats recession in the business cycle

A

falling levels of consumer spending and confidence mean lower profits for businesses - which start to cut back on investment. Space capacity increases + rising unemployment

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9
Q

whats slump in the business cycle

A

very weak consumer spending and business investment; many business failures; rapidly rising unemployment; prices may start falling

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10
Q

whats recovery in the business cycle

A

things start to get better; consumers begin to increase spending; businesses feel a little more confident and start to invest again; but it takes time for employment to stop growing

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11
Q

strategies during a recession

A
  • diversification into new markets
  • restructuring and delayering to reduce cost and minimise risks
  • greater investment, often when firms cut investment when struggling during a recession larger firms may be able to get ahead by investing eg apple, Dyson
  • sales promotions and price cuts
  • cutting costs/cost minimisation, reduced R&D, pay freezes, pay cuts, redundancies, different working patterns
  • mergers and takeovers, BA & Iberia
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12
Q

what is an exchange rate

A
  • an exchange rate is the price of one currency expressed in terms of another currency.
  • the exchange rate determines how much of one currency has to be given up in order to buy a specific amount of another currency
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13
Q

ways exchange rates impact business activity

A
  • price of exports in international markets
  • cost of goods bought from overseas
  • revenues and profits earned overseas
  • converting cash receipts from customers overseas
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14
Q

what might cause an increase in the exchange rate

A
  • increasing demand for exports = higher demand for the currency
  • lower demand for imports = lower demand for the currency
  • speculation, traders may bet that the exchange rate will rise
  • an increase In interest rates, making it more attractive to hold the currency
  • foreign direct investment into the country, higher demand for the currency
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15
Q

factors affecting the significance of exchange rates on businesses

A
  • the impact of changes in exchange rates on businesses will depend on:
  • how much they export to other economies
  • whether domestic businesses face strong competition from overseas firms in their markets
  • how much a business relies on importing goods and services from overseas in order to operate
  • the price elasticity of demand (PED) for a business’ products.
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16
Q

what does SPICED stand for

A

strong
pound
imports
cheaper
exports
dearer

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17
Q

what is inflation

A

inflation is a sustained increase in the average price level of an economy

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18
Q

how is inflation measured

A
  • by the annual percentage change in the level of prices as measured by the consumer price index
  • a sustained fall in the general price level os called deflation, in this situation the rate of inflation becomes negative
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19
Q

effects on inflation on consumers

A
  • money loses value and people lose confidence in money as the value of savings is reduced
  • inflation can get out of control, price increases lead to higher wage demands as people try to maintain their living standard
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20
Q

whats consumer price index (CPI)

A
  • the consumer price index is the main measure of inflation for the UK
  • the government has set up the Bank of England a target for inflation (using CPI) of 2%
  • the aim of this target is to achieve a sustained period of low and stable inflation
  • low inflation is also known as price stability
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21
Q

why was the rate of inflation so low in the uk (until post pandemic)

A
  • falling global commodity prices including oil
  • slow wage growth in the labour market
  • falling food prices (globally and supermarket price wars)
  • sustained price deflation in technology products
  • slower real economic growth, falling towards 2%
  • still some spare capacity on the supply side of the economy
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22
Q

why did inflation rise in 2022

A
  • inflation in the Uk peeked at 11.1% in October 2022. interest rates increased in a bid to control the economy.
  • higher energy costs, soaring wages as companies struggle to fill vacancies and disruption along supply chains
  • external shock - war in Ukraine gas disrupted supply chains of gas, oil and wheat
  • current inflation rate is 2.2% (October 2024), fallen from 6.8% (July 2023)
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23
Q

possible causes of demand pull inflation

A
  • an appreciation of the exchange rate decreases the price of imports
  • a reduction in direct or indirect taxation, consumers have more disposable income causing more demand
  • rising consumer confidence and an increase in the rate of growth of house prices
  • fasters rates of economic growth In other countries, providing a boost to Uk export overseas.
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24
Q

what are the two types of inflation

A
  • demand pull (when there is excess demand)
  • cost push (when costs arise)
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25
Q

whats demand pull inflation

A
  • occurs when there is excess aggregate demand in the economy or market
  • businesses respond to high demand by raising prices to increase their profit margins
  • demand pull inflation is associated with the boom phase of the business cycle
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26
Q

whats cost push inflation

A

occurs when costs of production are increasing
causes:
- external shocks
- a depreciation in the exchange rate
- acceleration in wages
what happens?
- firms raise prices to protect their profit margins
- ‘wages often follow prices’
- a rise in inflation can lead to rising inflationary expectations

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27
Q

inflation costs and consequences

A
  • money loses its values and people lose confidence in money as the value of savings is reduced
  • inflation can get out of control, price increases lead to higher wage demands as people try to maintain their living standards. this is known as a wage price spiral
  • consumers and businesses on fixed incomes lose out because their income falls, employees in poor bargaining positions lose out
  • inflation can favour borrowers at the expense if savers
  • inflation can disrupt businesses planning and lead to lower capital investment
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28
Q

is inflation always bad for businesses

A

no some inflation is good for business
- industry wide price rises enable revenues to grow
- growing revenues + constant gross margin = higher gross profit
- makes using debt as a source of finance cheaper in real terms

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29
Q

whats fiscal policy

A

the use of government spending, taxation and borrowing to acheive relevant objection

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30
Q

whats monetary policy

A

use of interest rates to determine cost of money

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31
Q

what are the fiscal taxes

A
  • income tax
  • corporation tax
  • VAT
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32
Q

what are taxes spent on by the government

A
  • health
  • education
  • social security
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33
Q

who manages the monetary policy

A

Bank of England

34
Q

what is budget surplus

A

where taxation is greater than government spending

35
Q

what is budget deficit

A

government spending is higher than taxation

36
Q

what is balanced budget

A

taxation is equal to government spending

37
Q

what are direct taxes

A

taxes taken directly from a persons income or a firm profit, eg national insurance, income tax, corporation tax

38
Q

what are indirect taxes

A

taxes on products and spending not directly taken from income eg VAT, road tax, stamp duty, fuel tax.

39
Q

what can taxes be used for

A
  • impact consumer spending and therefore demand
  • to provide and incentive to consumers to purchase products that benefit society eg solar panels
  • too dissuade consumers from purchasing those goods that have a negative impact eg alcohol, fuel and cigarettes
40
Q

whats corporation tax

A

a 20% tax rate companies oat on their profits. The current UK government have cut this rate in the past to encourage foreign firms to invest in the uk

41
Q

whats income tax

A

this is paid by all Uk taxpayers earning over a certain amount annually

42
Q

whats national insurance payments

A

national insurance payments are taken automatically from workers pay and contribute towards state benefits, such as pensions

43
Q

whats capital gains tax

A

paid when companies sell or dispose of assets that they may have made a profit on

44
Q

whats custom duties

A

taxes paid on some imported products

45
Q

whats excise duty

A

a tax on the production of certain products in the Uk eg tobacco, petrol, alcohol and gambling.

46
Q

whats proportional tax

A

With a proportional tax, the marginal rate of tax is constant leading to a constant average rate of tax
Eg: National insurance contributions (NICs)

47
Q

whats progressive tax

A

With a progressive tax, the marginal rate of tax rises as income rises. I.e. as people earn extra income, the rate of tax on each additional pound goes up. This causes a rise in the average rate of tax.
Eg: Income tax (basic and higher rates)

48
Q

whats regressive tax

A

With a regressive tax, the rate of tax paid falls as incomes rise – I.e. the average rate of tax is lower for people on higher incomes
Eg: Excise duties on tobacco and alcohol

49
Q

whats transfer payments

A

welfare payments made to benefit recipients such as the state pension and the jobseekers allowance

50
Q

whats current spending

A

spending on state provided goods and services such as education and health

51
Q

whats capital spending

A

infrastructural spending such as spending on new roads, hospitals, motorways and prisons.

52
Q

why does the government tax

A
  • fund projects (NHS)
  • fund benefits, distribution of wealth, tax high earners to give to poorer
  • Potholes
  • Pay public sector workers eg public school teachers, NHS workers.
  • Raise Revenue
  • Taxes may help correct market failures
53
Q

why have government spending

A
  • direct government (public sector) provision of : public goods, merit goods
  • provide welfare support for low income households / the unemployed
  • government spending is also a means of redistributing income within the society eg to reduce the scale of relative poverty
  • government spending can also be used as a tool to manage aggregate demand as part of macroeconomic policy
54
Q

whats monetary policy

A

the use of the money supply and/or the interest rate to influence the level of economic activity, inflation, the balance of payments and exchange rates

55
Q

what 4 factors influence business investment

A
  • actual and expected demand
  • expected profits and business taxes
  • business confidence
  • interest rates + availability of business finance
56
Q

what happens when interest rates fall

A
  • cost of servicing loans/ debt is reduced
  • consumer confidence should increase leading to more spending
  • effective disposable income rises
  • business investment should be boosted
  • housing market effects
  • exchange rate and exports
57
Q

whats money supply

A

the narrow money definition of the money supply is a measure of the value coins and notes in circulation and other money equivalents that are easily convertible into cash such as short term deposits in the banking system

58
Q

whats quantitive easing

A

is a monetary policy action where a central bank purchases predetermined amounts of government bonds or other financial assets in order to stimulate economic activity.

59
Q

whats forward guidance

A

is a tool used by a central bank to exercise its power in monetary policy in order to influence, with their own forecasts, market expectations of future levels of interest rates.

60
Q

whats free trade

A

Under a free trade policy, goods and services can be bought and sold across international borders with little or no government tariffs, quotas, subsidies, or prohibitions to inhibit their exchange.

61
Q

whats protectionism

A

the theory of practice of shielding a country’s domestic industries from foreign competition by taxing imports.

62
Q

whats are quotas

A

A limit on the amount of a specific product that can be imported into a country.

63
Q

what are examples of trade and protectionism

A
  • legislation impacting foreign firms
  • tariffs
  • quotas and licences
  • tax breaks
  • biased legal system and a lack of intellectual property protection
  • subsides
  • loans and grants with favourable repayment conditions
64
Q

what are subsidies

A

payments to domestic firms to encourage them to produce particular products and to help cover costs to enable lower prices to be charged than foreign rivals

65
Q

define globalisation

A

‘the geographic dispersion of industrial service and activities, for example research and development, sourcing inputs, production and distribution and the cross border networking of companies, for example through joint ventures and the sharing of assets’

66
Q

whats technical cooperation

A

allows co production and joint assembly

67
Q

whats franchising

A

selling the right to use brands and patents to another firm in exchange for an initial fee and share of future profits.

68
Q

whats licensing

A

permission to make a product in a certain country granted by the original manufacturer in exchange for a fee, eg Carlsberg, coca-cola. useful to pass on many costs such as transportation and manufacture to another firm

69
Q

key points of globalisation

A
  • a process in which economies have become increasingly integrated and inter dependent
  • globalisation is dynamic rather than an end state
  • globalisation is not inevitable - it can reverse, indeed the growth of world trade in goods and services slowed in recent years following the global financial crisis
70
Q

key characteristics of globalisation

A
  • greater trade across borders in goods and services
  • increase in transfers if capital including the expansion if foreign direct investment 51% of the largest economies in the word are corporations
  • high levels of labour migration both within and between countries
  • a shift in balance of economic and financial power from developed to emerging economies and markets
71
Q

factors contributing to globalisation

A
  • containerisation
  • technological change
  • economies of scale
  • differences in tax systems
  • less protectionism
  • growth of MNC/Transnational Co’s
72
Q

whats containerisation

A

a system of freight transport for use in sea shipping that has reduced the transport costs of moving thousands of different goods across the globe

73
Q

benefits to globalisation

A
  • encourages producers and consumers from deeper division of labour and economies of scale
  • competitive markets reduce monopoly profits and incentives businesses to seek cost reducing innovations
  • enhanced growth has led to higher per capita incomes
74
Q

what is an emerging market

A

is used to describe an economy in the process of rapid growth and industrialisation

75
Q

common features of emerging market

A
  • economies making a transition
  • rapid industrialisation
  • have potential to become developed economies
  • faster long term economies growth than most developed economies
  • many inhabitants still in poverty though economic growth is taking many out of poverty
  • business struggle to access global markets
76
Q

what are the four classic original emerging markets (BRICs)

A
  • Brazil
  • Russia
  • India
  • China
77
Q

What happened to the BRICs

A
  • research 15 years ago highlighted the prominent rise of the 4 emerging markets
  • particularly significant for developed economies, because of their scale and growth rate
  • Brazil has since entered a prolonged recession (As Russia did)
  • China has now become the worlds largest economy and in many respects is now a developed economy
78
Q

examples of current emerging markets

A
  • guyana
  • Mozambique
  • Rwanda
  • Bangladesh
  • Ethiopia
79
Q

perceived business threats from emerging markets

A
  • increasingly large pool of skilled, but low cost labour
  • undervalued currencies make their exports cheaper
  • inadequate protection of brand and other intellectual property
  • state subsidy of industries to make them more competitive globally
80
Q

business opportunities in emerging markets

A
  • growing numbers of educated middle class consumers, = growing consumer spending
  • cultural shifts, eg a higher demand for personal products, private education and health care
  • demand for infrastructure and other products and services from developed economies
  • source of high skilled but low cost labour (outsourcing/offshoring)
  • great potential for joint ventures and acquisitions
81
Q

key risk and threat of emerging markets

A
  • political instability
  • cultural differences / sensitivities
  • variable approaches to financial and legal dealings (eg contractual law)
  • corruption and bureaucracy still an issue
  • emerging markets becoming major exporters
  • low cost production makes developed economies uncompetitive in some markets
82
Q

why emerging economies are likely to continue to enjoy high growth rates

A
  • urbanisation process continues
  • industrialisation, especially in east Asia and SS Africa
  • population growth
  • per capita income growth, rise of middle classes and consumer society
  • workforce will continue to improve skills and be more productive
  • technological innovation in many emerging markets (especially in Korea, China, India

A-Level Business (21 decks)

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