2.5.1 - Economic Influence

Question 1

What is economic influence

Answer 1

• Economic influence is when a business is affected in any way by economic factors e.g. inflation, exchange rates etc.

Question 2

What is Inflation

Answer 2

• The annual rate of inflation shows how much higher or lower prices are compared with the same month a year earlier. It indicates changes to our cost of living
• The inflation rate is the rise in the price of goods in the UK economy

Question 3

What is CPI

Answer 3

• CPI looks at the prices of hundreds of things we commonly spend money on, including bread, cinema tickets and pints of beer - and tracks how these prices have changed over time.
• The inflation rates are expressed as percentages. If CPI is 3%, this means that on average, the price of products and services we buy is 3% higher than a year earlier.

Question 4

How are businesses affected by inflation

Answer 4

• As inflation rises so does the cost of products and services
• Cost of supplies, ingredients and raw materials will go up
• As costs go up due to inflation, business owners may need to increase their prices to maintain profitability
• Profit margins will be squeezed

Question 5

What are exchange rates

Answer 5

• The exchange rate is the price of one currency in exchange for another
• You may have “changed” your money up for a holiday abroad, and you will have been charged commission to do so
• Currencies can change in value and this is due to the demand and supply of a currency

Question 6

What is appreciation

Answer 6

• Appreciation means that there is a rise in the £pound against other currencies means the £pound can buy MORE foreign currency
• This may also be called a high value or strong value of the pound
• Strong pound means that imports will be cheaper and exports will be dearer

Question 7

What is depreciation

Answer 7

• A fall in £pound is called depreciation
• UK decision to leave the EU meant that the £pound fell sharply against other currencies
• This is bad news for UK tourists as their money will be worth less abroad

Question 8

What is SPICED

Answer 8

Strong
Pound
Imports
Cheaper
Exports
Dearer

-

Question 9

What is WPIDEC

Answer 9

Weak
Pound
Imports
Dearer
Exports
Cheaper

Question 10

How do interest rates work with the bank of england

Answer 10

• Interest rates means the cost of borrowing money
• The Bank of England is now responsible for deciding what the interest rate should be in the UK
• If the bank of England pushes up interest rates consumer and business spending will fall
• The bank of England will raise interest rates if inflation is high and lower them if inflation is not a problem within the economy
• Lower interest rates encourage economic growth and a fall in unemployment

Question 11

How do interest rates affect the cost of borrowing

Answer 11

• If interest rates on a loan are low then consumers may borrow money to buy; a car, sofa, holiday etc. This will stimulate demand for these products and services
• If interest rates go up then consumers will not borrow and so will save instead of spending, this is bad news for UK businesses that sell products and services that are heavily financed e.g. cars

Question 12

How are businesses affected by change in interest rates

Answer 12

• If interest rates rise then the cost of borrowing will rise and this will mean that the cost of supplies for a business may increase
• A fall in interest rates means that the cost of lending falls which may lead to an increase in profits (costs less to borrow so less to pay back)

Question 13

What is taxation

Answer 13

• The UK government requires its citizens and businesses to pay a variety of taxes
• These taxes are used to pay for; education in state schools, the armed forces, the 999 emergency services, the NHS and local councils to name a few
• If taxation increases then the costs of a business will also increase, which will reduce profitability

Question 14

How are business affected by changes in taxation

Answer 14

• Lower taxes can result in more demand in the economy and lead to higher output and employment
• If taxes are high then UK businesses will have higher costs
• This makes them less competitive in a global marketplace
• It may also mean unemployment rates may rise as businesses have to lay off extra staff due to the reduction in demand

Question 15

What are the taxes that smaller businesses (sole traders) pay

Answer 15

1. Income tax: taken off an employee’s or business owners’ salary.
2. VAT (only if they earn above £82,000) added to goods and services. A rise in VAT increases prices.
3. Business rates (but not if they work from home)
4. National insurance: contributions are payments made by both the employee and the employer. They pay for the cost of a state pension and the National Health Service. An increase in this tax raises a company’s costs and could result in inflation.

Question 16

What are the taxes larger business pay

Answer 16

• Corporation tax at 20%
• VAT at 20%
• Business rates on business premises
• National Insurance contributions to employees

Question 17

What are excise duties

Answer 17

• Excise duty has to be paid by customers on products which are considered to have negative effects on society, in essence a sin tax e.g. fuel, tobacco, beer, wine and spirits
• If a UK business produces these goods they may see a reduction in demand

Question 18

What is government spending

Answer 18

• Taxes that the government collects goes into a central pot – this is then spent on various things for the benefit of the UK society
• The person who makes the decisions about tax and how to spend it is the Chancellor of the Exchequer also known as the treasurer
• The budget, taxation and public spending is extremely complex but you only need to know how changes might affect UK business

Question 19

how is business affected by changes in government spending

Answer 19

• If the government decides to cut government spending to reduce the deficit (amount it owes) this can have an impact on
  businesses which supply goods or services to public organisations e.g. the NHS
• Businesses affected for example in spending cuts may be care home providers, school builders

Question 20

What effect does economic uncertainty have on the business environment

Answer 20

• A series of financial shocks since the recession in the UK in 2008 has meant that there has been macroeconomic uncertainly
• This means that with a risk of unemployment that consumers are delaying the purchase of goods
• This means that demand falls for goods and services
• As a result of uncertainty manufacturers are reluctant to expand and to grow which affects and reduces supply of goods and services