Economic factors

• What is the Business cycle?

  The natural expansion and contraction of economic growth that happens in an economy over a period of time
• Stages of the business cycle

  • Boom
  • Recession
  • Bust/trough
  • Recovery
• Boom in business cycle

  A period of strong economic expansion where many businesses are operating at full capacity or above capacity, and the unemployment rate is very low. 

  • Inflation and interest rates increase
  • Profit levels are high
  • High level of consumers borrowing and spending
  • Boom in housing market
• Bust in business cycle

  A period of time during which economic growth decreases rapidly.

  • High levels of unemployment
  • Low levels of investment
  • Low inflation
  • High levels of spare capacity
  • Reduced spending by consumers especially on consumer durable
• Recovery in business cycle

  When the economy returns to positive actual growth following a recession

  • Investment occurs
  • Firms increase output
  • Spare capacity used
  • Unemployment falls
  • Consumer confidence grow
• What is Fiscal policy?

  Government's use of spending and taxation to influence the economy. This is done to:

  • control inflation
  • Stimulate economic growth
  • higher rate of employment
  • trade balance
• What is direct tax?


  Tax levied directly on individuals or organizations based on their income or wealth. Examples include:

  • Income tax
  • National insurance
  • Corporate tax
  • Capital gains tax
  • Inheritance
• What is indirect Tax?

  Taxes charged on goods and services that are paid to a third party in the first insurance. This is so that they can be passed on to the government. This includes:

  • VAT
  • Excise tax
  • Customs duty
  • Council tax
  • Business rate
• Impact on businesses: change in taxation

  • Reduced tax gives consumers more disposable income, thus increasing demand
  • Increased tax discourages spending ans reduces demand
  • Corporate tax may increase available profits for businesses which may stimulate investment
  • Change to VAT will affect the price to consumers and costs to a business
• What are subsidies?


  Financial assistance or support given by the government or an organization to individuals or businesses to promote economic activities or achieve specific goals.
• Government expenditure


  The government buys goods and services from UK businesses. Purchases can include social security, highway maintenance, building construction, etc. Two types that this is done:

  • Transfer payment
  • The infrastructure
• What is exchange rate?

  The rate at which one currency can be exchanged for another.

  • If high exchange rate - Strong pound imports cheaper exports dearer
  • If low exchange rate - weak pound imports dearer exports cheaper
• How does exchange rate affect exports?

  • A rise in exchange rate means exporting goods cost more for overseas customers (demand falls)
  • A fall in value means exported goods cost less for overseas customers (demand increases)
• How does exchange rate affect imports?

  • A rise in value means imports costs less so more profit is made or price is reduced
  • A fall in value means imports cost more so less profit is made or price is increase
• What is interest rate?


  The cost of borrowing money or the return on investment. Interest rate is set by the Bank of England.
• Effects of high interest rate on consumer

  • Less spending by borrowers (cost of borrowing increase)
  • More saving by savers
  • Less spending as smaller amounts of disposable income
  • More money is spent on mortgage than other items
• Effects of high interest rates on businesses

  • Encourages businesses to save more as the return is grater
  • Encourages debtors to delay payments
  • Reduction in the sales of luxury items ans items normally bought on credit (sofa, TV)
  • Higher overheads for business (loans become more expensive
  • Reduction in expansion? growth (may delay buying, machinery, factory, etc)
• If interest rate increases

  
  

  • The UK becomes a more attractive location for foreign investors
  • Foreign investors purchase pounds to invest in UK banks
  • Demand for pounds increase
  • Therefore, raising the price (exchange rate)
• If interest rate decrease

  • The UK becomes less attractive to investors
  • Foreign investors sell pounds for other currencies
  • Supply of pounds increase causing exchange rate to fall
• Objectives of raising interest rates

  • To reduce the level of consumers spending
  • To reduce inflation
  • Slow the level of economic growth
  • Reduce the number of imports
  • dampening down an economic boom
• The objectives of reducing interest rates

  • Reduce levels of unemployment
  • Stimulate the level of production in the economy
  • Promote exports sales by reducing the exchange rate of the pound
  • To assist in recovery from a slump
  • Increase rate of economic growth in the economy
• Consequences of high interest rates

  • Business will have a fall in sales
  • Business will reduce borrowing
  • Businesses may cancel or postpone investment plans
  • Demand for products purchased on credit may decline significantly
• Consequences of low interest rate

  • Demand and sales are likely to increase
  • Production is likely to be stimulated by increasing employment
  • Export sales of price sensitive products may increase whilst imports becomes less competitive
• What is transfer payment?

  This is the expenditure on unemployment benefits, pension and other social security payments. An increase in transfer payments often results in substantial increase in demand of basic goods.
• The infrastructure


  Government improve the infrastructure through their spending on housing, roads and flood protection. Investment such as these increase the level of economic activity by boosting the demand for the service of construction whilst reducing costs for other businesses.
• What is inflation?


  Increase in the general price level of goods and services in an economy over a period of time.
• What is demand-pull inflation?


  When demand for goods and services rises faster than the supply of those goods and services.
• What is cost-push inflation?

  When the cost of production increases, leading to higher prices for goods and services.
• How does high rates of inflation affect the business?

  • Wages and raw material costs will increase
  • Some businesses will invest more as the value of loans will quickly fall
  • Overseas businesses may gain a competitive advantage
  • Some businesses may hold back on investment as interest rates are likely to rise
  • People will save more due to uncertainty and interest rates are frequently raised
• How does low rates of inflation affect the business

  • Wages and raw material costs will decrease
  • Some businesses will invest less as the value of loans will quickly raise
  • Overseas businesses may gain a competitive disadvantage
  • Some businesses may investment more
  • People will spend more as they have more disposable and high interest rates
• What is unemployment?


  The state of being without a job. There are 3 types of unemployment:

  • Structural unemployment
  • Cyclical unemployment
  • Frictional unemployment
• What is structural unemployment?

  Unemployment caused by a mismatch between the skills of job seekers and the requirements of available jobs. It is long lasting unemployment as it due to the shifts of the economy.
• What is cyclical unemployment?

  Unemployment which is caused by the changes in the business cycle.

  (E.g if the economy is in a bust, there is high levels of unemployment)
• What is frictional unemployment?

  Temporary unemployment that occurs when people are transitioning between jobs.