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Subject Assessment 4 Revision- Appreciation Of The £ (Theme 2- External…
Subject Assessment 4 Revision- Appreciation Of The £ (Theme 2- External Influences, Economic Influences)
Inflation
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Effects Of Inflation On Business:
- if a business is in a fixed price contract, inflation may negatively impact them
- if inflation in the UK is higher than other countries, they may lose competitive advantage as customers will buy from cheaper countries
Causes Of Inflation:
Demand:
- booming economy
- increased consumer demand for goods, meaning increased prices
Costs:
- rising cost of production
- rise in cost of imported goods
- rise in tax
Deflation Definition:
Opposite to inflation, a period of time when the average prices drop.
Exchange Rates
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Effects Of Exchange Rates On Business:
- £ appreciates
Exports: selling products abroad will be more expensive for foreign customers to buy, so sales volume could drop
Imports: cheaper for UK businesses to buy raw materials from foreign countries
- £ depreciates
Exports: selling products abroad will be cheaper for foreign customers to buy, so sales volume could increase
Imports: more expensive for UK businesses to buy raw materials from foreign countries
Exchange Rate Calculation:
- £ -> another currency
multiply the amount of £ by the exchange rate to get the foreign currency
eg: £1 = $1.50
£1,000 = (1,000 x 1.5)= $1.500
- another currency -> £
divide the amount of foreign currency by the exchange rate to get the £
eg: $2 = £1
$1,000 = (1,000 / 2)= £500
Interest Rates
Interest Rates Definition:
The reward for saving, and the cost for borrowing, expressed as a %. This is set by the Bank of England
Effect Of Increased Interest Rates On Business:
- consumers are less willing to spend money and more inclined to save resulting in reduced demand for businesses
- the interest on any big loans a business has will rise, increasing business costs
- businesses are less likely to invest as its less risky to keep the money in the bank and earn interest as the rates are high
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Why The Bank Of England Increases Interest Rates:
- increasing interest rates encourages consumer saving and discourages consumer spending
- this may be done to slow down the economy
Taxation
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Effect Of Increased Taxation On Business:
- higher costs (corporation tax)
- consumer have less disposable income, less spending, lower sales for businesses
Direct Taxes (income):
- income tax
- corporation tax
- national insurance
- capital gains
Indirect Taxes (spending):
- VAT (Value Added Tax)
- council tax
- custom tax
- excise duties
Types of VAT:
- standard rate= 20% tax on most standard goods and services
- reduced rate= 5% tax on items such as children's car seats
- zero rate= 0% tax on some goods like food and childrens clothing
The Business Cycle
The Business Cycle Definition:
The pattern of increases and decreases in the economy, measured by the % of GDP change, over a long period of time
Effect Of The Business Cycle On Business:
Depends on YED (income elasticity of demand)
- recession and depression, lower consumer spending, business failure
- boom and recovery= increasing consumer spending, higher business revenues/ profits
GDP Definition:
Gross Domestic Product- Used to measure the size of a country's economy based on the country's output
Stages Of The Business Cycle:
- Boom= strong economy, lots of spending, low unemployment
- Recession= falling levels of spending and employment
- Depression= weak economy, little spending, high unemployment
- Recovery= beginning to improve
Economic Uncertainty
What Is Economic Uncertainty?
Economic influences such as inflation, exchange rates, interest rates, taxation, government spending, and the business cycle cannot be predicted which leads to uncertainty with consumer spending and business decisions
Government Spending
Effect Of Government Spending On Business:
- increased government spending means higher taxes
- higher taxes means less consumer disposable income and lower sales for businesses
However some business rely heavily on government spending:
- construction firms that repair the roads
- the NHS
- other public sector businesses