Economic influences 2.5.1

Question 1

What does Economy mean?

Answer 1

The system by which a country’s money and goods are produced and used.

Question 2

What is GDP?

Answer 2

The total value of a country’s output in a year.

Question 3

What is Inflation?

Answer 3

A general rise in prices or a fall in the value of money.

Question 4

What are the 2 Measurements of Inflation?

Answer 4

Retail Price Index (RPI) – a measurement of a ‘basket’ of goods and services representative of what people buy in the UK.

Consumer Price Index (CPI) – similar to RPI but mainly excluding housing costs.

Question 5

How does inflation have an effect on businesses?

Answer 5

• Increased costs due to higher inflation.
• Can be passed onto the consumer if the product is price inelastic.
• This has an impact on the pricing strategy of a firm.
• Some firms will reduce the supply of the product, having a major effect on operations management as capacity is reduced and the firm rationalises with a greater focus on cost minimisation.
• It becomes increasingly difficult to maintain competitiveness.

Question 6

What are exchange rates?

Answer 6

The price of one currency in terms of another e.g. £1 = $1.50

Question 7

What is appreciation?

Answer 7

An increase in the value of a currency is called an appreciation this means the currency is worth more e.g. £1 = $1.60

Question 8

What is depreciation?

Answer 8

A decrease in the value of a currency is called a depreciation this means the currency is worth less e.g. £1 = $1.40

Question 9

What is SPICED?

Answer 9

Strong Pound: Imports Cheaper Exports Dearer

• Firms that import will be able to buy cheaper raw materials and finished goods.
• Firms that export will see less demand.

Question 10

What is WPIDEC?

Answer 10

Weak Pound: Imports Dearer, Exports Cheaper

• There will be greater demand from abroad for UK goods.
• Input prices will increase if raw materials are imported.
• If the firm has a price inelastic product it will be able to pass the increase in costs onto the consumer.

Question 11

What are interest rates?

Answer 11

The price of money i.e. the cost of borrowing or the reward for saving.

Question 12

How do interest rates have an effect on businesses?

Answer 12

• If a firm has loans or overdrafts this will effect the amount that has to be paid in interest which is a cost to a business.
• Investments either become more or less attractive influencing the ability of firms to grow by investing in new capital equipment or larger premises.
• Influences the level of demand by consumers.
• If interest rates are high saving is more attractive and spending less attractive.
• Interest rates will affect customers willingness to spend on credit.
• High interest rates will mean that consumers have less disposable income e.g. higher mortgage payments and therefore a fall in demand for other products.
• Higher interest rates mean that foreign investors will invest in UK banks for higher returns and therefore an increase in demand for the £ will see its value appreciate – making exports dearer.

Question 13

What is taxation?

Answer 13

Taxation is the process of imposing charges on business and individuals by the government.

Question 14

How does taxation have an effect on businesses?

Answer 14

• A cut in income tax may give consumers more disposable income, thus raising consumption.
• However If income tax is raised this may discourage spending and reduce consumption.
• A cut in corporation tax may increase available profits for firms which may stimulate investment.
• Changes to VAT will affect the price to consumers and also the costs to a business

Question 15

What is Government Expenditure?

Answer 15

The expenditure by the government on supplying goods and services to achieve economic and political objectives.

Question 16

How does government spending have an effect on businesses?

Answer 16

• Increased government spending may mean higher taxes.
• Higher taxes reduce the ability of customers to purchase goods and services, which is likely to reduce consumer spending.

Question 17

What is the Business Cycle?

Answer 17

Fluctuations in the level of economic activity over time.

Question 18

How does the business cycle have an effect on businesses?

Answer 18

• If their products are perceived by customers as representing good value for money, or a cheaper alternative than more expensive products, then consumers are likely to switch.
• During a boom, such businesses should enjoy strong demand for their products.

Question 19

In a business cycle, what happens in a Boom?

Answer 19

High levels of consumer spending.

Question 20

In a business cycle, what happens in a Depression/ Slump?

Answer 20

A prolonged period of declining GDP.

Question 21

In a business cycle, what happens in a Recession?

Answer 21

Falling levels of consumer spending and confidence.

Question 22

What are economic shocks?

Answer 22

Shocks are unpredictable events.

Question 23

What is the effect of economic uncertainties on the business environment?

Answer 23

Uncertainty could push businesses to cut back on production, investment and employee compensation.