6.1 External influences on business issues (Knowledge))

Question 1

What are the 4 stages in the business cycle/ economic cycle/ trade cycle

Answer 1

• Growth (recovery)
• Boom
• Recession
• Slump

Question 2

Characteristics of a boom in the business cycle

Answer 2

• GDP growth high (output high)
• Unemployment low/increased costs for businesses as wages are high
• Prices are raising
• Few low-priced (inferior) goods are sold
• Expensive luxury items are bought
  => Increase interest rates to help reduce demand to control inflation; people choose to save rather than spend

Question 3

Characteristics of recession (downturn) in the business cycle

Answer 3

• Demand falls (less spending)
• GDP falls (output lowers)
• High interest rates (cost of borrowing money) =>
• Employment falls
• Less income to buy luxury goods
• Inflation is reducing

Question 4

Characteristics of slump (depression) in the business cycle

Answer 4

• GDP falls substantially (very low output)
• High unemployment
• Low-priced goods are bought (inferior goods)
• Prices may fall
  => In order to increase demand, central bank lower interest rates so people borrow more and save less

Question 5

Characteristics of recovery (upturn) in the business cycle

Answer 5

• GDP rises due to corrective action from the government
• Employment rising
• Inflation starting to increase again
• More income to buy luxury goods

Question 6

How changes in employment levels affect the business ?

Answer 6

• Affect the ability of the business to recruit new employees & also the income of customers
• If unemployment rises:
  +Easier to recruit employees as there are more people to choose from
  +Customers may have lost their jobs => income levels may have fallen & reducing the amount of sales by the business
  +Businesses sell cheaper products may see sales increase as customers cut back on spending & buy cheaper alternatives

Question 7

How rising inflation can affect the business ?

Answer 7

• Rising inflation increases business costs
  => Prices of products have to be increased & lead to falling sales for the business
• Rising prices of essential products => consumers have less income available for non-essential products
• The effect of increasing inflation on businesses depend on type of products they sell

Question 8

How increasing GDP can affect the business ?

Answer 8

• Increasing GDP means that the economy is growing
• Generally, businesses will benefit from increasing sales as more people have jobs & therefore income to spend buying products
• May start to get more difficult to recruit new employees if unemployment starts to fall at the same time

Question 9

What are the government economic objectives ?

Answer 9

1. Low inflation
2. Low unemployment
3. Economic growth
4. Balance of payments between imports and exports

Question 10

Inflation is an important objective, with high inflation what are the problems it can cause ?

Answer 10

• Worker’s wages will not but as many goods as before => people’s real incomes fall => workers may demand higher wages to balance out their real incomes
• Prices of goods produced will be higher than other countries => people buy foreign goods & jobs in the country will be lost
• Businesses unlikely to want to expand & create more jobs in the near future => living standards fall
  => Low inflation encourage business to expand & make it easier for a country to sell goods & services abroad

Question 11

What are the problems that unemployment cause ?

Answer 11

• Unemployed people do not produce any goods/services => the total level of output in the country will be lower than it could be
• Government pays unemployment benefit to those without jobs => high level cost the government lots of money => can’t be spend on other things e.g schools & hospitals
  => Low unemployment increases output of a country & improves workers’ living standards

Question 12

What are problems result from no economic growth/falling in GDP ?

Answer 12

• Output is falling => fewer workers are needed & unemployment rises
• Average standard of living of the population (goods &services they can afford to buy in 1 year) decline => most people become poorer
• Business owners will not expand the business as people have less money to spend on the products they make

Question 13

What are the problems from balance of payments deficit (more imports than exports) ?

Answer 13

• Country could “run out” of foreign currencies & may have to borrow from abroad
• The exchange rate will be likely to fall (exchange rate depreciation) => The country’s currency will now buy less abroad than it did before depreciation

Question 14

What are the main ways in which governments can influence the economy (economic policies) ?

Answer 14

1. Fiscal policy - taxes & government spending
2. Monetary policy - interest rates
3. Supply side policies

Question 15

How income tax affects business activity ?

Answer 15

• Individual taxpayers would have a lower disposable income if the rate of tax increase
  => have less money after tax to spend & save
  => businesses likely to see fall in sales
  => Managers may decide to produce fewer goods as sales are lower
  => Some workers could lose their jobs

Question 16

Which businesses are likely to be affected most by increase in income tax ?

Answer 16

• Businesses which produce luxury goods which consumers do not have to buy are affected most
• Businesses producing essential goods & services will be less affected as consumers still have to buy those products

Question 17

How would an increase in the rate of corporation tax affect businesses ?

Answer 17

1. Businesses have lower profit after tax => managers have less money to put back in to the business => more difficult to expand & new projects e.g additional shops have to be cancelled
2. Lower profit after tax is a bad new for owners as less money pay back to owners => fewer people want to start their own business as government take a large share of profits made => company share prices fall

Question 18

How would businesses be affected by an increase in an indirect tax ?

Answer 18

1. Prices of products rise => consumers buy fewer items => reduce demand for products made by the business
   + Not all businesses will be affected the same way e.g if need to buy new battery, still buy despite rise in price
   + Buy less ice creams as not essential
2. Prices rise so workers notice their wages buy less in shops => real incomes have declined => businesses may be pressured to raise wages & increase costs of making products

Question 19

How would businesses in a country be affected if the government put tariffs on imports into the country?

Answer 19

1. Benefit if they compete with imported goods => these become more expensive => increase in sales of home-produced goods
2. Higher costs of imported raw materials/components for their factories as these are
   more expensive
3. Other countries take same action & introduce import tariffs too (retaliation) => business export to these countries sell less than before

Question 20

What is another method government can used to limit imports apart from import tariffs ?

Answer 20

Import quotas, by physically limit on the quantity of a product than can be brought in

Question 21

How government in most countries spend the tax revenue they receive ?

Answer 21

• Education
• Health
• Defence
• Law and order
• Transport - roads & railways

Question 22

What businesses can be affect by government cut on spending to save money ?

Answer 22

• Produce equipment for schools, hospitals and defence equipment
• Build roads, bridges & railways

Question 23

What are the main effects of higher interest rates ?

Answer 23

1. Firms with existing variable interest loans may have to pay more in interest to banks => reduce profits => less is available to distribute to owners & less retained for expansion
2. Managers thinking about borrowing money to expand delay decision => new investment in business activity reduce => fewer new factories & offices built
3. Entrepreneurs hoping to start a new business may not now be able to afford to borrow the capital needed

Question 24

What are some special cases of effect for higher interest rates ?

Answer 24

• Business makes expensive consumer items e.g cars will notice consumer demand falls => consumers unwilling to borrow money for expensive items => businesses reduce output & make workers redundant
• Encourage foreign banks & individuals to deposit capital into that country as they can earn higher rates of interest on their capital => by switching their money into this country’s currency => increase demand for it => making imported goods of this country cheaper & exported goods more expensive

Question 25

What are some of the policies that are used to achieve the aims of supply side policies ?

Answer 25

1. Privatisation - very common, the aim is to use the profit motive to improve business efficiency 2. Improve training & education - improve the skills of the country's workers => important in industries e.g computer software which are often short of skilled staff 3. Increase competition in all industries - can be done by reducing government controls over industry / by acting against monopolies

Question 26

How businesses might react to increase in income tax which reduces the amount customers have to spend ?

Answer 26

Possible decision: - Lower prices on existing produces to increase demand - Produced "cheaper" products to allow for lower prices Possible problems: - Less profit made on each item sold => reduces gross profit margin - Brand image might be damaged by using cheaper versions of product

Question 27

How businesses might react to increase tariffs on imports ?

Answer 27

Possible decisions: - Focus more on domestic market as locally produced goods are seem cheaper - Switch from buying imported raw materials to locally produced ones Possible problems: - Might still be more profitable to export - Foreign materials & components might be of higher quality

Question 28

How businesses react to increase in interest rates ?

Answer 28

Possible decisions: - Reduce investment => future growth will be less - Develop cheaper products => customers can afford - Sell assets for cash => reduce existing loans Possible problems: - Other companies might still grow => market share will be lost - Consumers might start to think that quality and brand image are lower - Assets might be needed for future expansion

Question 29

How business react to increase in government spending ?

Answer 29

Possible decision: - Switch marketing strategy to gain more public-sector contracts e.g building/equipping for schools/hospitals Possible problem: - May be great competition if other businesses take same action