2.5.1

• inflation 


  the average increase in prices of goods or services in an economy, over a period of time
• how is inflation measured?

  price changes on same product from a year earlier
• causes of inflation 


  demand pull - excess demand

  cost push - when costs rise
• demand pull inflation 


  excess demand in the economy or market

  businesses respond by raising prices to increase profit margins

  associated with the boom in the business cycle
• causes of excess demand 


  a depreciation of the exchange rate

  a reduction in direct or indirect taxation

  rising consumer confidence

  faster rates of inflation in other countries
• cost push inflation 


  occurs when costs of production are increasing
• causes of cost push inflation 


  external shocks

  depreciation in exchange rates

  acceleration in wages
• consequences of inflation on a business 


  increased production costs

  demand

  competitivness

  prices

  wages

  margins

  consumer behaviours
• relationship of price elasticity and inflation 


  inelatic PED will be less affected by a rise in inflation

  some firms may not be affected as they become more efficient
• consequences of inflation on customers 


  cost of living

  real income levels

  prices

  demand

  product subsitution

  value of savings
• exchange rates 


  the price of one curreny expressed in terms of another currency
• importance of exchange rates


  price of exports in international markets

  cost of goods brought overseas

  revenue and profits earned overseas

  converting cash form customers overseas
• floating exchange rates 


  if demand for the £ rises relative to supply, then the value of the £ will appreciate

  if the supply for £ on the foriegn exchange market increases relative to demand, then the value of the £ will depreciate
• appreciation 


  creates a stronger currency
• depreciation 


  creates a weaker currency
• effect of a stronger £ on a UK business 


  S- stronger

  P- pound

  I- imports

  C- cheaper

  E- exports

  D- dearer

  firms that import will be able to buy cheaper raw materials and finished goods
• effects of a weaker £ on UK businesses 


  W- weaker

  P- pound

  I- imports

  D- dearer

  E- exports

  C- cheaper

  there will be a greater demand from abroad for Uk goods

  production prices will increase if raw materials are imported
• real incomes 


  measure the amount of disposable income avaliable to consumers after taxes are paid
• interest rates 


  the reward for saving, and the cost of borrowing
• types of interest rates in the economy

  saving interest rates

  borrowing interest rates
• impact on consumers if there is a fall in interest rates 


  cost of loans/ debt is reduced

  lowers mortgage costs

  increase in custoemr confidence

  focus on spending not saving
• impact on consumers if interest rates rise 


  costs of loans/ debt is increased

  increased mortgage costs

  decrease in customer confidence

  focus on saving not spending
• impact on a business if interest rates rise 


  costs of loans/ debt increase

  raises mortgage costs

  harder to borrow money

  decrease in consumer confidence
• impact on a business if interest rates fall 


  cost of loans/ debt is reduced

  lowers mortgage costs

  easier to borrow money

  increase in consumer confidence
• fiscal policy 


  involves to use of government spending, taxation anf borrowing to affect the level and growth of aggregate demand, output and jobs
• taxation 


  the process of imposing charges on businesses and individuals by the government
• direct taxation 


  charged on income, wealth and profit

  includes: income tax, corporation tax, capital gains tax
• indirect taxation 


  charged on spending by consumers on goods and services

  include: VAT, excise duties
• corporation tax 


  charged on all profits
• effects of corporation tax on a business 


  cuts- may increase available profits form firms which may stimulate investment

  increase- may decrease available profits, slowing down investment
• income tax


  tax an individual pays on their income
• effects of income tax on businesses 


  cut- may give customers more disposable income, thus raising consumption

  increased- may discourage spending and reduce consumption
• VAT 


  consumers are charged VAT on goods and service they buy
• effect of VAT on a business

  changes to VAT will effect the costs to a business
• 3 main areas of government spending

  transfer payments

  current spending

  capital spending
• government spending 


  the expenditure by the government on supplying goods and services to achieve economic and political objectives
• effects on government spending on businesses 


  benefits paid will reduce poverty

  pay rates to public sector workers will affect disposable income

  budgets allocated to public sector organisations- NHS

  spending on infrastructure
• measure of economic growth 


  GDP

  the total monetary of market value of all finished goods or services, produced within a countrys borders, in a specific time period
• business cycle 


  slump

  recovery

  boom

  recession
• boom phase 


  high levels of custoemr spending, business confidence, profits and investments

  prices and costs tend to rise faster

  low unemployment