Economic Influences Flashcards
(44 cards)
What do interest rates tell you
The cost of borrowing or the return of savings
Changes in interest rates affect what
- Businesses costs if it has a loan or mortgage
- Consumer spending
What does high interest rates mean for consumers
Means most consumers have less money to spend
- People with existing borrowing (mortgages) have to pay more money back in interest, so they have less disposable income
- People are also more likely to save to take advantage of the interest earned on their savings, reducing demand
Low interest rates is the opposite (more borrowing and spending, less saving)
What products will interest rates have the biggest effect on
Products that often require borrowing like cars, houses etc
What’s inflation
Overall increase in the price of goods and services within an economy
What’s the two different types of inflation
- Demand-pull
- Cost-push
What’s demand-pull inflation
When there’s too much demand (more than the economy can supply)
- happens when there’s an increase in disposable income so people buy more, and businesses can’t supply goods quickly enough, so increase their prices
What’s cost-push inflation
When rising costs push up prices
What’s the rate of inflation
Percentage change in price of goods and services within an economy, in one year compared to the previous year
Describe the process of a wage-price spiral
- A business expects its suppliers to put their prices up
- Therefore, the business puts their prices up to cover expected increase in costs
- Rising prices cause people to demand higher wages
- Causing prices to rise more due to increased labour costs
- As wages increase, disposable income increases, demand rises, causing prices to go up more
- This wage-price spiral is a big cause for cost-push inflation
How does inflation in the UK effect globally
- When inflation in the UK is high it makes exports expensive abroad, and UK business become less competitive
- When inflation in the UK is low, UK businesses have a competitive advantage globally
What’s deflation
Overall decrease in the price of goods and services within an economy
How does deflation occur (opposite of inflation)
Not enough demand, so businesses reduce prices
What’s the result of deflation
A fall in productivity as businesses won’t keep supplying the market with goods that nobody wants. Lower productivity means firms don’t need as many workers, therefore deflation often leads to unemployment
What can be used as a measure of inflation
Consumer price index
Average value of basket / base value of basket X100
What products will suffer from inflation
Premium goods, as customers will look for cheaper goods
Why might periods of high inflation be a good time to expand
If interest rates are lower than inflation, it’s cheap for them to borrow money to invest in new premises and machinery
- interest they’d earn on their savings would be less than the amount prices would have gone up by in the same time, so makes sense to spend rather than save
Why do businesses compare UK and foreign interest rates
When UK interest rate is high or fluctuating, firms tend to expand into countries with low, stable interest rates as it’s cheaper to borrow money for expansion there
Why’s it hard to plan when inflation rates are high
Because it needs stable prices to make accurate forecasts
What’s an exchange rate
The value of one currency in terms of another currency
If £1 has moved from being worth $1.20 to $1.60 how would you describe this
The pound has appreciated or strengthened against the dollar
- If the amount of dollars decrease to the pound then the pound has depreciated or weakened against the dollar
When the exchange rate increases (e.g. the pound appreciates against the dollar) what happens to exports and imports
- UK exports become more expensive abroad, which is bad for UK exporters as their products become less competitively priced abroad. Meaning exporters may have to decrease their prices which will decrease their profits
- Increase in exchange rates is good for UK importers as imports become cheaper, meaning higher profitability
When the exchange rate decreases (e.g. the pound depreciates against the dollar) what happens to exports and imports
- UK exports become cheaper for other countries. Good for UK exporters as their products become more competitively priced abroad, so may be cheaper than similar products offered by businesses in other countries
- UK imports become dearer. UK importers may change suppliers so that they buy from UK suppliers instead. Or may increase prices, to cover costs of buying from their suppliers
Using an exchange rate of €1.41 to £1, convert £47 into euros
£47 x 1.41 = €66.27
