Economic issues

• Business Cycle

  The upturns and downturns in the level of a country's economic activity (Gross Domestic Product or GDP) over time
• Stages of the Business Cycle

  • Growth
  • Boom
  • Recession
  • Slump/Depression
• Recession

  An economy experiences two consecutive quarters (6 months) or more of negative GDP growth
• Slump

  An extended period of negative GDP growth
• Growth stage

  A period of increasing rates of GDP growth
• Boom

  A period of time when an economy experiences an extended period of increasing rates of GDP growth
• Recession and Slump

  Unemployment is likely to be rising
• Growth and Boom

  Unemployment is likely to be falling
• Inflation

  The sustained rise in prices in an economy over time
• In the UK, inflation reached a peak of more than 11% in 2022, driven largely by increased fuel costs
• By late 2023, Eurozone inflation had returned to a relatively low level of 2.9%
• Problems Caused by Rising or Fluctuating Inflation

  • Increased costs
  • Changing consumer spending habits
  • Reduced international competitiveness
  • Uncertainty
• Increases in GDP

  Associated with growth and boom periods
• Fall in GDP

  Associated with recession and slump periods
• Government Economic Objectives

  • Economic growth
  • Low unemployment
  • Low inflation
  • Healthy balance of payments
• Positive economic growth

  The increase in the amount of goods and services produced per head of population over a period of time
• Inflation

  A general increase in prices and fall in the purchasing value of money over time
• Unemployment

  The number of people without a job who are actively seeking and available for work
• Balance of payments

  The relationship between the value of imports and exports over a period of time
• Types of Taxes

  • Direct taxes (e.g. income tax, corporation tax)
  • Indirect taxes (e.g. value-added tax (VAT), customs duties)
• Increased government spending

  Usually funded by increases in taxes or increases in public sector borrowing
• In recent years, the UK government has increasingly focused on reducing government spending
• In contrast, the Portuguese government's economic plan in the same period has involved spending on infrastructure and prioritising R&D to grow its economy
• Supply-side policies

  Policies adopted by governments to make their economies more efficient and increase the competitiveness of domestic industries
• Recent Examples of Supply-side Policies

  • Privatisation of public sector organisations
  • Investment in training & education
  • Regulations to increase competition
• Interest rate

  The cost of borrowing money and the reward for saving
• Implications of Rising Interest Rates

  • Higher repayments
  • Fall in exports
  • Credit sales fall
  • Savings become more attractive than investment
• Possible Responses of Businesses to Changes in Economic Policy

  • Increase investment as borrowing should be cheaper and retained profits attract low levels of interest
  • Develop new products targeting wealthier/credit customers
  • Reduce spending on internal training as higher-quality staff are available
  • Lower prices to allow them to compete with cheaper imports
  • Stock imported goods over domestic brands
  • Use higher retained profits to reward shareholders with increased dividends
  • No longer take steps to avoid paying taxes