2.5.1 Economic influences

Question 1

define inflation

Answer 1

a general rise in prices in an economy over time

Question 2

what 2 ways can inflation be calculated?

Answer 2

-consumer price index
-retail price index

Question 3

How does the consumer price index measure inflation?

Answer 3

measures monthly changes in the price of goods and compares them to earlier periods calculating the rate of inflation

Question 4

How does the retail price index measure inflation?

Answer 4

it calculates the percentage change in the cost of a basket of retail goods

Question 5

What are the 2 causes of inflation?

Answer 5

-Too much demand so it pulls up prices
-cost pushing (prices increase because costs do)

Question 6

What 3 problems may be caused by inflation?

Answer 6

-Increased cost

-Higher loan repayment

-consumers change spending habits

Question 7

How is increased cost a problem for the business?

Answer 7

-supplies increase the cost of raw materials
-utilities like electricity increase
-workers demand higher wages to compensate for the cost of living

Their overall profit margin will decrease so the business is at risk of not breaking even or having very low margins of safety and levels of profit

Question 8

How is higher loan repayments a problem for businesses?

Answer 8

Bank of England raises interest prices

This is a problem because the business will be unable to innovate products if their money is tied up in repaying loans

Question 9

How is consumers changing spending habits a problem for businesses?

Answer 9

customers stop making unnecessary purchases and may reduce demand for ‘wants’
This is a problem because businesses will only be able to sell products that are a necessity which decreases their overall profit made

Question 10

Give a benefit of inflation to a business

Answer 10

the rising prices, leads to growing revenue which will lead to higher gross profit

Question 11

Define disinflation

Answer 11

when inflation falls prices are still rising just more slowly
-better for business

Question 12

Define exchange rate

Answer 12

the value of one currency expressed in terms of another

Question 13

Give 3 reasons why exchange rates may fluctuate

Answer 13

-changing demand for a currency
-economic growth
-changes to interest rates

Question 14

define appreciation

Answer 14

Increase in the value of the pound against other currencies

Question 15

What impact does appreciation have on exporting businesses

Answer 15

-sales likely to fall as products become more expensive compared to oversea comp

Question 16

What impact does appreciation have on an importing businesses

Answer 16

-costs likely to fall as suppliers overseas become cheaper compared to those domestically produced

Question 17

define depreciation

Answer 17

decrease in the value of the pound against other currencies

Question 18

What impact does depreciation have on exporting businesses

Answer 18

-sales likely to rise as products become cheaper compared to overseas

Question 19

What impact does depreciation have on an importing businesses

Answer 19

-costs likely to rise as suppliers from over seas become more expensive compared to those domestically produced

Question 20

What does spiced stand for?

What does this mean for the uk?

Answer 20

Stronger pound imports cheaper exports dearer

This means theres more foreign competition as its hard for the Uk to sell overseas but its cheaper to import raw materials

Question 21

Define interest rate

Answer 21

a % reward offered for saving and a % charged for borrowing money

Question 22

Who sets the interest rate?

Answer 22

the bank of england- this is usually used as a benchmark for others

Question 23

How can an increase in interest rates benefit a business?
(give 2 ways)

Answer 23

Businesses can have a higher return on their savings which may allow them to innovate and meet specific demands

It can also increase their revenue as customers may be willing to spend more due to an increase in their reward for saving

Question 24

Give a disadvantage to a business of interest rates increasing

Answer 24

they will have to pay more on a new or variable rate borrowing, which will increase their cost

Question 25

How can low interest rates benefit a business

Answer 25

It lowers the cost of borrowing for a business so cheaper to expand etc

Question 26

What is taxation?

Answer 26

Where the government collects monetary contributions from individuals and businesses for the overall benefit of the nation

Question 27

What is the difference between direct tax and indirect tax?

Answer 27

direct tax- passes from the payor straight to the government (eg corporation tax) indirect tax- passes from payor to supplier to government (eg VAT on prods)

Question 28

How can an increase in tax impact a business's revenue?

Answer 28

-Revenue may fall as people will have less disposable income so demand may fall -customers may use alternative products as increased VAT makes products more expensive

Question 29

How can an increase in tax impact a business's costs?

Answer 29

-operating costs will rise as a result of increased taxes -higher costs may cause the business to increase prices which may cause sales to fall and profit to decrease

Question 30

How can an increase in tax impact a business's decisions?

Answer 30

-Business spending and investment to improve products may be affected by an increase in corporation tax as they may retain profit for future expenses

Question 31

How may a business benefit from an increase in tax?

Answer 31

If tax increases are used to reduce national debt they contribute to economic stability which creates a more favorable environment for business growth and investment. This results in more predictable planning and market so can plan accuretely and confidently make right decisions

Question 32

How may a business benefit from a decrease in tax?

Answer 32

Lower taxes can directly increase a business's net income allowing for higher profit margins

Question 33

How does increased government spending benefit businesses

Answer 33

Businesses may become more willing to invest themselves, leading to greater economic activity

Question 34

How does increased government spending disadvantage businesses

Answer 34

Gov spending is usually funded by increases in tax This may cause people to budget if revenues are not raised as they will have less disposable income

Question 35

What is the business cycle?

Answer 35

The fluctuations in a nations economic activity

Question 36

What are the 4 stages in the business cycle?

Answer 36

-Expansion -peak/boom -recession -trough

Question 37

What happens in the expansion stage? (what are businesses likely to do and what are consumers likely to do?)

Answer 37

-Theres increasing economic activity, rising GDP, and growing employment -Businesses are likely to invest in production and widen their portfolio -Consumer spending increases therefore demand rises and it leads to higher production levels

Question 38

What happens in the peak/boom stage? (what may be a concern?)

Answer 38

-Economy reaches its highest level of activity Employment, production and sales are at max BUT inflation may become a concern

Question 39

Give an advantage and a disadvantage of a business being in the peak/boom stage

Answer 39

A- increased sales and rev as customers have disposable income D- interest rates likely to increase the cost for the bus to borrow.

Question 40

What happens in the recession stage?

Answer 40

-Economic growth is declining, GPD falls, unemployment rises and consumer spending decreases

Question 41

Give an advantage and a disadvantage of a business being in the recession stage

Answer 41

A- It's easy to recruit workers D- decreased revenue as customers have less disposable income

Question 42

What happens in the trough stage?

Answer 42

It is the lowest point of the business cycle where economic activity and GDP is at their lowest BUT the economy may begin to recover leading back to the expansion stage

Question 43

When does economic uncertainty occur? (what will businesses find hard?)

Answer 43

When it's difficult to forecast the level of demand and supply in an economy -Businesses will find it hard to plan and they are likely to be reluctant to make decisions

Question 44

How can businesses be prepared for economic uncertainty (2 ways)

Answer 44

-consider the 4ps Price- decrease product- delivers place- ecommerce promotion- advertise -build up cash reserves

Question 45

What may businesses do in uncertainty relating to: structure investment HRM

Answer 45

May de-layer the organisational structure May invest in less May make redundancies, and give staff fewer hours