Economic Environment (AQA A Level Business): Flashcards

Sudden currency swings make it harder to plan the cost of imports or overseas contracts.

True.

Higher unemployment reduces consumer confidence and spending power across the whole economy, even for businesses whose own staff aren't directly affected.

Marketing may shift towards value-focused messaging and adjust pricing and promotions to suit more price-sensitive customers.

Finance must manage the cost and availability of borrowing as interest rates change. It must also budget for the impact of inflation on costs and revenue.

Economic growth is an increase in the value of goods and services produced by an economy over a period of time, usually measured as the percentage change in GDP.

Real GDP growth adjusts for inflation. It shows the true increase in output rather than just rising prices.

A recession occurs when an economy experiences two consecutive quarters (6 months) or more of negative economic growth.

During a downturn, businesses may find it relatively easy to recruit workers from a larger pool of candidates.

True.

In a boom, interest rates are likely to rise. The higher cost of borrowing increases the risk of capital investment.

Fast growth can push inflation up, because demand for resources, labour and materials rises faster than supply.

If growth slows, increased costs, such as extra staff or inventory, don't disappear as quickly as revenue can fall.

False.

Growth isn't felt evenly, so some sectors or regions keep struggling. Modest growth can also leave real consumer spending power squeezed.

Direct taxes are levied on income, such as income tax and corporation tax. Indirect taxes are levied on spending, such as VAT and excise duty.

Fiscal policy is the government's use of taxation and spending together to influence the economy.

Increasing government spending or cutting taxes to boost a slowing economy is known as expansionary policy.

Less profit is retained after tax. This leaves businesses with less to fund investment and expansion.

Higher VAT makes products more expensive. Customers may switch to alternative products, so revenue may fall.

It may move to a low-tax location. It may also change production methods to reduce its use of highly-taxed components.

Inflation is a sustained rise in the general price level of goods and services in an economy over time.

The UK uses the Consumer Prices Index (CPI), which is based on average price rises of a typical basket of goods bought by UK households.

Demand-pull inflation occurs when total demand in the economy grows faster than the economy's ability to supply goods and services.

Cost-push inflation occurs when rising production costs are passed on to customers as higher prices.

The Bank of England's inflation target is two per cent, set by the government.

True.

When inflation is low and stable, the future value of returns is more certain, so businesses can plan long-term investment with more confidence.

Staff push for higher wages to protect their real income. This raises labour costs and the risk of industrial disputes.

Interest rates are the cost of borrowing money, or the reward for saving it, usually expressed as a percentage of the amount borrowed or saved.

The base rate is set by the Bank of England's Monetary Policy Committee (MPC), which meets roughly eight times a year.

Higher rates make borrowing more expensive and saving more attractive, so spending and demand fall. Businesses then have less room to keep raising prices.

False.

The Bank of England raises the base rate when inflation is too high. It cuts the base rate when the economy needs a boost.

SMEs are especially exposed to rising interest rates because they often rely on variable-rate loans and overdrafts.

Fixed-rate borrowing protects against further rate rises. It also gives more certainty over future costs.

Borrowing becomes more expensive and the risk of committing to repayments increases. Businesses may delay investment until rates fall.

An exchange rate is the value of one currency expressed in terms of another.

Appreciation is a rise in the value of one currency relative to another.

Exchange rates fluctuate because of changing demand for a currency, economic growth and changes to interest rates.

The export price in foreign currency is calculated using this formula:

Export price in foreign currency = UK price in pounds × Exchange rate

The import cost is £9,500, because the foreign price is divided by the exchange rate ($13,300 ÷ 1.40).

True.

A stronger pound makes UK exports more expensive abroad, so exporters' sales are likely to fall.

When the pound depreciates, importing businesses may seek domestic suppliers to reduce costs and maintain profit levels.

Hedging is a way of fixing a future exchange rate to protect a business against currency volatility.

Its products become cheaper than overseas competitors', so it may increase selling prices to raise its profit margins.

Unemployment is the number of people who are able and willing to work but cannot find a job, usually expressed as a percentage of the labour force.

The UK uses the Labour Force Survey and the claimant count, both published by the Office for National Statistics.

False.

Rising unemployment creates a larger pool of job applicants. This makes hiring easier and often reduces the wages businesses need to offer.

Fear of job losses weakens consumer confidence, so people become more cautious with spending.

During periods of low unemployment, businesses may increase recruitment and training budgets to attract and retain scarce staff.