Theme 2.5: External Influences (Economic Centric)

Question 1

Inflation

Answer 1

A sustained increase in the average price level of the economy I.e there is a fall in the value of money. Best measure is a freddo, was 15p now 30p

Question 2

How is inflation measured?

Answer 2

Using the consumer price index (CPI) which is a measure of how much the price of a wide range of goods changes, usually referred to as a basket of goods and services

Question 3

Deflation

Answer 3

A sustained decrease in the average price level in the economy I.e there is rise in the value of money for example a Mars bar may have cost 60p in 2018 but 55p in 2019 except this would be on a much larger scale

Question 4

How can inflation affect a business?

Answer 4

. Uncertainty in inflation can make business less likely to invest
. Profitability can be reduced due to rising costs of supplies and wages
. If inflation increases faster than foreign competitors then it may be harder to maintain competitiveness from rising costs
. Inflation can make loans easier to repay due to the reduction in the value of money
. Inflation makes the likes of credit and mortgages more difficult for consumers to pay off, this means they have less disposable income which can lower a businesses revenue

Question 5

Exchange Rates

Answer 5

The value of one currency in relation to another e.g £1 could be worth $1.60. This can change over time

Question 6

Depreciation

Answer 6

The values of one currency against another goes down

Question 7

Appreciation

Answer 7

The value of one currency against another goes up

Question 8

What happens when the pound appreciates?

Answer 8

. Exports become more expensive as foreign countries have to give up more of their money for the same number of pounds.
. Imports become cheaper because you can buy more foreign currency for the same amount of pounds, leading to increased profitability

Question 9

What happens when the pound depreciates?

Answer 9

. Exports become cheaper because foreign countries can spend less of their currency on the same amount of pounds.
. Imports become more expensive because you have to spend more pounds on the same amount of a foreign currency.

Question 10

What does SPICED stand for?

Answer 10

Strong
Pound
Imports
Cheap
Exports
Dear

Question 11

Interest rate

Answer 11

The price of borrowed money. Charged when taking out a loan and payed when saving money in savings

Question 12

Impact of an increase in interest rates on a business

Answer 12

. Businesses are less likely to borrow and expand
. Slower growth due to less expansion and less start ups due to less incentive to borrow
. Consumers are less likely to borrow for bigger items such as holidays and cars etc this means spending may fall
. Mortgage repayments increase meaning people will have less disposable income
. As a result of the impact on customers, many business will face falling demand on their goods and services

Question 13

Impact of a decrease in interest rates on a business

Answer 13

. Investment may increase as loans are cheaper so businesses may expand
. Since the cost of loans are low there may be more business start ups
. Consumer spending increases as the likes of credit cards and loans are cheaper and the consumer has more disposable income
. Many businesses will see a rise in demand for goods and services due to the impact on consumers

Question 14

Direct Taxation

Answer 14

Taxes charged on earnings that effects the levels of disposable income

Question 15

Indirect Taxation

Answer 15

Taxes charged on things such as spending (VAT) and so on

Question 16

Direct Taxation Examples

Answer 16

. Income Tax
. Corporation Tax
. National Insurance
. Corporation Tax

Question 17

Indirect Tax Examples

Answer 17

. VAT - Value Added Tax
. Exercise Duties - Sugar Tax, Smoking and alcohol charges
. TV license
. Car Tax
. Road Tax
. Bedroom Tax

Question 18

How could a government cut to public spending effect a business?

Answer 18

. Some benefits gain sales directly from the government
. Large businesses that supply the government may face difficulties e.g Airbus supplies the army with Typhoon aircraft, a cut to the defence spending could have knock on implications
. Less people will be employed so the average income will be less so less money is spent plus luxury goods much less likely to be bought.

Question 19

Public Spending Cuts simplified chain of events

Answer 19

Public Spending Cuts > Public Sector Redundancies > Lower Incomes > Less Spending > Less demand for consumer goods > Sales revenue falls

Question 20

What is economic growth measured by?

Answer 20

The GDP of the country in question in terms of percentage change

Question 21

What does GDP stand for?

Answer 21

Gross Domestic Produce

Question 22

What does GDP Measure?

Answer 22

The total value of all goods and services produced within the economy over a period of time. Basically is the total income of an entire country

Question 23

What does the business cycle refer to?

Answer 23

The fluctuations in the levels of growth or decline in the GDP over a period of time.

Question 24

What is the business cycle also referred to as?

Answer 24

Trade Cycle and Economic Cycle

Question 25

What is the long term trend of a business cycle?

Answer 25

The average change in the GDP over a certain period of time taking into account all economic stages of the business cycle

Question 26

What is a ‘Boom’ in the economy?

Answer 26

A period of rapid growth and expansion in a coountry

Question 27

What is a ‘Downturn’ in the economy?

Answer 27

A period where the boom slows and the rate of growth decreases

Question 28

What is a ‘Recession’ in the economy?

Answer 28

When the GDP suffers negative growth for at least two consecutive quarters i.e lower output

Question 29

What is a ‘Recovery’ in the economy

Answer 29

Growth in the economy returns, beginning slowly but increasing in pace

Question 30

Name two ways a business may be affected by a ‘Boom’ in the economy

Answer 30

Positive:
. More businesses will start up and old businesses will be more likely to expand
. Sale of most goods and services will increase
. Unemployment is low and consumers have more money to spend.
. Consumers may switch to more luxury goods due to the rising incomes.
Negative:
. Prices may rise for materials due to excess demand
. Inflation may cause some businesses to struggle
. Shortage of skilled labour may mean costs go up as a result of having to increase wages, this can impact prices

Question 31

Name two ways a business may be affected by a ‘Downturn’ in the economy

Answer 31

Positive:
. Inflation may ease
. Sellers of inferior goods are more likely to see an increase in revenue
Negative:
. Sales of most goods and services will be lower
. Unemployment will begin to rise, consumer spending is less
. Investment slows amongst the uncertainty

Question 32

Name two ways a business may be affected by a ‘Recession’ in the economy

Answer 32

Positive:
. Rise in the sale of inferior goods
. Costs may fall due to over supply of materials
Negative:
. Sales of most goods and services are lower
. Unemployment is high so consumers have less money to spend.
. Investment will decrease
. Many businesses may fail under the pressure
. Production may have to be cut
. Supply may exceed demand drastically in some areas

Question 33

Name two ways a business may be affected by a ‘Recovery’ in the economy

Answer 33

Positive:
. Sales revenue for many products and services will begin to rise
. Unemployment decreases, consumers have more money
. Investment increases due to higher confidence
Negative:
. Inflation may begin to return
. Tougher competition from those who survived the recession

Question 34

What stage of the business cycle is the UK in now?

Answer 34

Recovery - Increases of lower than 0.5% per quarter on average

Question 35

Economic Forecasting

Answer 35

The process of predicting future economic trends and events. Created through analysis by the likes of the bank of England and Office of Budget Responsibility

Question 36

Contingency Plan

Answer 36

A ‘what if’ plan that allows solutions to how a business would be able to cope in a range of different circumstances such as a recession

Question 37

Why is a contingency plan good?

Answer 37

Minimises the impact of an event and saves time when it comes to reacting to the scenario, giving them a competitive advantage over any ill prepared competitors