Economic Factors - GDP & Economic Cycle + Economic Policy (monetary and fiscal for tax, interest and inflation)

Question 1

How to measure economic growth

Answer 1

With GDP

= it’s the total value of output in an economy (goods+services)
= measured every 3 months
= am estimate for, questionnaires based on 46,000 British firms
= currently at 0.4-0.5

Question 2

What’s the economy

Answer 2

The collective behaviour of a number of different groups I.e.

• government
• people acting as employees of businesses and consumers of their products
• the different business sectors in the UK
• UK’s trading relationship with other countries especially EU

Question 3

What’s macro economics

Answer 3

The study and analysis of the behaviour of the whole economy

Question 4

Marco economic objectives:

Answer 4

= a low and stable inflation rate

= high employment levels

= economic growth

Question 5

What’s inflation

Answer 5

inflation is the persistent tendency for prices to rise = high rate is bad so bad for business

Question 6

Why you want a low level of inflation

Answer 6

Makes UK exports uncompetitive

• due to globalisation any products can be made anywhere in the world so if the UK has a high inflation rate then those in other countries, the price of UK exports will be less attractive to consumers abroad

Inflation can reduce investment

• MNC look to produce in cheapest possible location and don’t want to locate where raw materials and labour is expensive as it makes their products uncompetitive

Inflation creates uncertainty

• managers don’t like uncertainty to investment returns so with a deflating inflation then how much will the returns be worth then? With low inflation rates, businesses can plan their investments with a certain degree of certainty about their financial return to encourage investment

Question 7

Why high level of employment is an i,portent macroeconomic objective

Answer 7

• because unemployment is a waste of Human Resources
• unemployment is bad for the individual as it’s associated with social problems i.e drug abuse
• it’s bad for society as a whole as it has to be paid for with benefits

Question 8

Why economic growth is an objective

Answer 8

Main benefit to it is that if more goods and services are produced then people have a higher standard of living

Growth should be sustainable considering future generations and the environment etc.

Question 9

Balance of payments equilibrium

Answer 9

Term used to describe the financial records of the UK’s trade with the rest of the world

Inflows and outflows of money = the balance of trade

The balance of trade is the record of all the UK’S imports and exports

Trade deficit = MORE IMPORTS THAN EXPORTS
Trade surplus = MORE EXPORTS THAN IMPORTS

Question 10

How economic policy has an effect on businesses

Answer 10

It’s concerned with trying to meet the 4 objectives and creating a environment where the businesses will thrive + grow

Done through:

• monetary policy
• fiscal policy
• supply side policies
• exchange rate

Has to use economic policy to alter behaviour of people as it cannot simply tell them what to do

They’re used depending on what economic objectives the government or bank or England are trying to achieve

Question 11

Monetary Policy

Answer 11

Concerned with MANIPULATING THE LEVEL OF DEMAND IN THE ECONOMY through INTEREST

Question 12

What the rate of interest is concerned with and to who

Answer 12

TO BORROWERS
- the cost of borrowing

TO SAVERS
- the reward for saving

There are also different rates for the different savers and the different rates for the different borrowers I.e. how long it’s for, how much it is, depending on risk)

Essentially it’s the price of money

Question 13

Who sets interest rates

Answer 13

The Bank of England as they’re at the top of the banking hierarchy and feed it down to the customer

Currently 0.5% but was 0.25% but the actual rate is the rate your bank has set you - LEND at more than THEY SAVE rate

Question 14

How monetary policy works

Answer 14

The demand for money responds to changes in the rate of interest
^^^ the price of something will effect its demand in the first place

Question 15

Bank of England operating it and adjusting how people respond

Answer 15

I.e. Want consumers to spend less =
= raises interest to discourage borrowing and spending
= fall in demand for money
= encourage saving perhaps

If the Bank of England wants to slow down the economy + control inflation by lowering consumer spending and business investment then it will raise the interest rate

Question 16

Ideal interest rate

Answer 16

The higher the better!!!!!!

Question 17

Rise in interest rates will mean

Answer 17

A fall in investment

• more expensive to borrow then less likely to expand or make update machinery etc.
• suppliers of the machinery will receive a fall in investment
• slow down consumer spending
• no one will want to invest so a slow down of economic activity that could cause a recession

Consumer spending will fall

• spending on other products falls as there is a rise for spending on mortgages, loans etc
• not enough demand for luxury goods
• people saving their money so less spending
• people with lots of loan debts can’t save
• also slow down rate of growth of house prices so their property value won’t rise and so they may feel less confidence about spending so demand will be lower

STERLING POUND IS MORE ATTRACTIVE

Question 18

Fall in interest rates will mean

Answer 18

More investment

• investments made with borrowed money so it’s now cheaper to borrow money
• expansion and spending
• investment raises the level of economic activity
• boosts GDP
• more consumer spending
• more competition

Consumer spending will increase
- now pay less interest on mortgages/loans etc so goods and services purchasing will be higher

UK EXPORTS ARE CHEAPER AND IMPORTS EXPENSIVE WITH WEAK £

Question 19

What’s the credit crunch

Answer 19

2008 financial crises

Mortgages and loans were harder to obtain and costed more

Overcame this by lowering interest rates to make it easier and cheaper for businesses and customers to repay loans and feel confident about lending again

Question 20

How long does it take for interest rates to come into action

Answer 20

Bank of England working on a 8 month timescale for interest rates changes to have their full effect on investment, consumption and the exchange rate

Consumers also take their time to react in response to the change

Hopes to do it gradually anyway rather than suddenly

Question 21

What’s fiscal policy

Answer 21

Conducted through Taxation and Government spending

Controlled by the government through the chancellor of the exchequer

It affects the level of demand in the economy

Question 22

Direct tax vs. Indirect tax

Answer 22

Taxes you pay specifically (income tax)

Whereas indirect tax is:

Tax being paid through so,some else or another organisation (VAT)

Question 23

Last year what the government collected for, us and what it spent back on us

Answer 23

Government collected £612 billion

Spent back £720 billion in us

How? It’s more?

= £108 billion was from borrowing to fill the gap using BONDS
= where you borrow money off people looking to save and spend it back with interest later on

Question 24

Types of taxes

Answer 24

• VAT = 20% indirect
• Road Tax = direct
• Excise Duty = out the price up to deter you away but it’s inelastic demand and will be bought anyway
• Sugar/fat Tax
• Plastic bags
• Petrol = consuming it contributes to economy environmentally
• Gambling tax = 10%
• Council Tax
• Stamp Duty (for moving house)
• Inheritance Tax
• Income Tax
• National Insurance

Question 25

The big 3 taxes

Answer 25

= Income Tax

As it goes up ⬆️, people are poorer and there’s less disposable income, demand ⬇️, revenue ⬇️, profit ⬇️»»» back to the start in a loop

= VAT and Duty Tax

Price ⬆️ so demand ⬇️ = PED

= Corporation Tax

The tax on profit for Ltd and Plc
Income tax for Partnership and Sole Trader

Retained profit ⬇️, dividends ⬇️, investment ⬇️, expansion ⬇️, unemployment ⬇️

Question 26

Depends on

Answer 26

• which tax it is
• size of the tax change
• PED
• the type of good (could respond different if its luxury)
• size of the tax originally
• MPC = Marginal Propensity to Consume
  = what you’re likely to do with the extra money you had if you had it

Question 27

Supply side policies

Answer 27

Where fiscal and monetary policies manipulate level of demand where’s supply side policies aim to improve the economy’s overall productive capacity

Designed to make markers and industries operate more efficiently

Contribute to a faster rate of economic growth as well as a more sustainable growth = less danger of inflation from a rise in demand if total supply is also increasing

They also make a country more competitive internationally too

Essential for the long term health of a country and living standards

Question 28

Supply side policies;

Answer 28

• reducing welfare benefits so the unemployed can take jobs
• cut income tax so people seek work so they can keep more of their money they earn
• cut corporation tax so a business is encouraged to invest in new things like buildings or R+D
• I,proved education and training to improve the workforce skills, flexibility and productivity
• encourage business start ups and expansion