External economic influences on business behaviour

Question 1

Economic growth

Answer 1

an increase in a country’s productive potential measured by an increase in its real GDP.

Question 2

Gross domestic product (GDP)

Answer 2

the total value of goods and services produced in a country in one year – real GDP has been adjusted for inflation.

Question 3

Business investment

Answer 3

expenditure by businesses on capital equipment, new technology and research and development.

Question 4

Business cycle

Answer 4

the regular swings in economic activity, measured by real GDP, that occur in most economies, varying from boom conditions (high demand and rapid growth) to recession when total national output declines.

Question 5

Recession

Answer 5

a period of six months or more of declining real GDP.

Question 6

Inflation

Answer 6

an increase in the average price level of goods and services – it results in a fall in the value of money.

Question 7

Deflation

Answer 7

a fall in the average price level of goods and services.

Question 8

Working population

Answer 8

all those in the population of working age who are willing and able to work.

Question 9

Unemployment

Answer 9

this exists when members of the working population are willing and able to work, but are unable to find a job.

Question 10

Cyclical unemployment

Answer 10

unemployment resulting from low demand for goods and services in the economy during a period of slow economic growth or a recession.

Question 11

Cyclical unemployment

Answer 11

unemployment resulting from low demand for goods and services in the economy during a period of slow economic growth or a recession.

Question 12

Structural unemployment

Answer 12

unemployment caused by the decline in important industries, leading to significant job losses in one sector of industry.

Question 13

Frictional unemployment

Answer 13

unemployment resulting from workers losing or leaving jobs and taking a substantial period of time to find alternative employment.

Question 14

Balance of payments (current account)

Answer 14

this account records the value of trade in goods and services between one country and the rest of the world. A deficit means that the value of goods and services imported exceeds the value of goods and services exported.

Question 15

Exchange rate

Answer 15

the price of one currency in terms of another.

Question 16

Exchange rate depreciation

Answer 16

a fall in the external value of a currency as measured by its exchange rate against other currencies. If $1 falls in value from €2 to €1.5, the value of the dollar has depreciated in value.

Question 17

Imports

Answer 17

goods and services purchased from other countries.

Question 18

Exports

Answer 18

goods and services sold to consumers and

business in other countries.

Question 19

Exchange rate appreciation

Answer 19

a rise in the external value of a currency as measured by its exchange rate against other currencies. If $1 rises from €1.5 to €1.8, the value of the dollar has appreciated.

Question 20

Fiscal policy

Answer 20

concerned with decisions about government expenditure, tax rates and government borrowing – these operate largely through the government’s annual budget decisions.

Question 21

Government budget deficit

Answer 21

the value of government spending exceeds revenue from taxation.

Question 22

Government budget surplus

Answer 22

taxation revenue exceeds the value of government spending.

Question 23

Monetary policy

Answer 23

is concerned with decisions about the rate of interest and the supply of money in the economy.

Question 24

Market failure

Answer 24

when markets fail to achieve the most efficient allocation of resources and there is under- or overproduction of certain goods or services.

Question 25

External costs

Answer 25

costs of an economic activity that are not paid for by the producer or consumer, but by the rest of society.