Economic Influences

• what is inflation?

  a general rise in prices or a fall in the value of money
• what is the rate of inflation?

  shows how prices have changed based on the same period a year ealier
• what is consumer price index

  a measurement of inflation based on a basket of goods and services representative of what people buy in the uk excluding household costs
• what are exchange rates?

  the value of a currency in terms of another
• what is appreciation

  an increase in the value of a currency
• what is depreciation

  a decrease in the value of a currency
• what are interest rates

  the price of money
• what is taxation?

  a financial charge by the government on an individual or firm
• what is government spending?

  the amount of expenditure undertaken by the government on an annual basis
• what is the business cycle?

  fluctuations in the level of economic activity over time
• what is economic uncertainty?

  the economic environment is difficult to accurately predict and prone to shocks or unpredictable events
• what is gross domestic product?

  the value of all final goods and services produced within a country in a year
• what are the phases of the business cycle?

  • Boom - high levels of customer spending, low unemployment, prices and costs rise faster
  • recession - falling levels of spending, spare capacity increases, unemployments rises
  • slump/depression - weak customer spending, businesses fail, prices fall, high unemployment
  • recovery - consumers begin to spend again
• what should a business do in recession or slump?

  • cut back on investment
  • market inelastic products
  • scale back capacity
  • make workers redundant
• what should a business do in recovery or growth!

  • maximise profits
  • expand into more markets
  • increase capacity
  • recruit new workers
• effects of inflation

  • increased costs
  • lower profit margins
  • falling sales due to an increase in price
  • reduced international competitiveness
• effects of a falling interest rate?

  • cost of loan repayment is reduced
  • more consumer spending
  • disposable income rises
  • investments are boosted
  • more demand for houses
  • higher inflation
• effects of a rising interest rate

  • cost of borrowing rises
  • reduced household income
  • less spending and investment
  • lower inflation
• what effects exchange rates

  • price of a currency
  • demand and supply
  • economic stability
• what is SPICED

  strong pound imports cheap exports dear
• what is WPIDEC

  weak pound imports dear exports cheap
• what does a fall in the value of the pound mean?

  • threat to uk firms
  • opportunity for importers
  • constraint on exporters
  • (opposite for a rise in value)
• what is direct tax?

  tax on income wealth and profit
• what is indirect tax?

  tax on spending
• what do governments spend on?

  • transfer payments
  • current spending
  • capital spending