LC BUISNESS- BUSINESS AND THE ECONOMY

REBECCA'S LC BUISNESS- BUSINESS AND THE ECONOMY KNOWT

an economy

how businesses, consumers and governments trade and interact with each other in the production and distribution of goods and services

free enterprise

government has little to no involvement e.g usa

centrally planned

government controls all decisions on production of goods and service e.g north korea

Mixed Economy

combination of free enterprise and centrally planned systems e.g ireland

advantages of free enterprise

consumers have a wide choice of goods and service

disadvantages of free enterprise

large gap can develop in the distribution of wealth

advantages of central planned

more equal distribution of wealth

disadvantages of central planned

lack of profit motive makes firms inefficient

advantages of mixed economy

consumers have a wide choice of goods and service

disadvantages of mixed economy

private industry is encouraged but regulated by the government

Economic growth

demand in the economy for goods and services

Gross Domestic Product - GDP

• measures the value of goods and services produced in a country

• includes goods and services produced by foreign-owned businesses that are located in that country

Gross National Product - GNP

• measures the value of goods and services produced by citizens and businesses of a country, whether they are in Ireland or abroad

economic boom

level of activity in an economy rapidly rises e.g celtic tiger

economic recession

GDP growth is negative and falls for 2 consecutive quarters (6 months)

Interest rates

cost of borrowing capital expresed a percentage of the amount borrowed

name 3 impacts of an increase in interest rates on Irish businesses

• reduced profits

• decrease in sales

• business confidence

businessness confidence

relating to business expansion

fiscal policy

how government use the timing structure and size of government payments and expenditure to influence what is happening in the economy e.g if spending is low due to a recession they could consider introducing a reduced payment of vat on hospitality to stimulate the economy

name 4 benefits of economic growth

• higher employment

• business confidence

• low government expenditure

• higher business sales and profits

state and explain 4 benefits of economic growth

• higher employment: An increase in demand for goods and services leads to a rise in employment levels, and it becomes easier to find employment

• business confidence: economic growth creates confidence in the market, which encourages potential entrepreneur to establish their own businesses and males existing firm more likely to expand

• low government expenditure: government spends less on social welfare payments, e.g. jobseekers benefit. Allocate money previously spent in social welfare to other areas such transport and education

• higher business sales and profits: consumers buy more good and services from business which increase their sales therefore profits

name the 5 economic variables

• inflation

• interest rates

• exchange rates

• employment

• taxation

inflation definition

sustained percentage increase in the price of goods and services in an economy from one period to the next e.g. one year.

deflation definition

occurs when the rate of price increase is less than zero i.e prices are falling

Interest rates of eu countries

just below 2%

inflation formula

increase in price /previous price x100/1

consumer price index

measure inflation, takes average of household basket of goods and monitors how much of the basket of good increase, amount it increases is called inflation

CPI

consumer price index

In terms of the impact of economic variables, what are the 4 sections it impacts

• government

• business

• consumer

• challenges/ opportunities

impact of rising and declining inflation

• government:

  • rising inflation: may need to increase tax credits to maintain the level of disposable income of individuals

  • deflation: government receives less VAT revenue. Consumers postpone purchasing items as they believe that prices may fall further.

• business:

  • rising inflation: falling sales as consumers may purchase goods and services at a cheaper price from suppliers outside Ireland

  • deflation: price of raw materials may fall, and the business can pass on lower prices to consumers

• consumer:

  • rising inflation: increase in the price of goods and services may force consumers to demand pay rises

  • deflation: consumers have more confidence as their purchasing power has increased

• challenges/ opportunities:

  • rising inflation: there maybe industrial action due to increased pay demands from employees.

  • deflation: lower prices charged by firms reduces profits revenues

ECB

european central bank

impact of interest rates

• government:

  • rising interest rates: a

    reduction in spending by consumers reduces VAT revenue

  • declining interest rates: businesses decide to expand, leading to higher employment levels

• business:

  • rising interest rates: businesses may postpone expansion as the cost of borrowing has increased

  • declining interest rates: consumers may borrow more money and purchase more goods and services

    
    

• consumer:

  • rising interest rates: If interest rates on deposit accounts increase, consumers may decide to save their money rather than spend it in the economy

  • declining interest rates: the cost of mortgage repayments will reduce, if the ECB lowers interest rates
    

• challenges/opportunities:

  • Rising interest rates: businesses may take out too many loans

  • Declining interest rates: People may be unable to repay mortgages, and the financial institutions will repossess their homes

exchange rates definition

the price of one currency expressed in terms of another, e.g. 1 euro = 0.88 sterling

impact of exchange rates

• government:

  • increase in value of euro: sales may decline in export businesses

  • decrease in value of euro: An increase in the cost of essential imports for government organisations

• business:

  • increase in value of euro: The firm’s products may be more expensive in foreign markets, which may lead to a decline in sales

  • decrease in value of euro: Increased export sales may lead the business to recruit more staff
    

• consumer:

  • increase in value of euro: consumers will have greater spending power while on holiday/travelling in non-eurozone countries

  • decrease in value of euro: Consumers may switch from buying imports as they become more expensive

• challenges/opportunities:

  • increase in value of euro: consumers may decide to purchase items from non-eurozone countries

  • decrease in value of euro: businesses may take the opportunity to sell into new foreign markets

unemployment rate definition

the percentage of people who are out of work but actively seeking unemployment

labour force definition

total population of a country except those under 18 and over 65, people in fulltime education and people out of work due to a long-term illness

impact of changes in unemployment rates

• government:

  • increase unemployment: Increased expenditure on social welfare payments

  • decrease unemployment:

• business:

  • increase unemployment: The business can find it easier to find suitable staff as there are more people out of work

  • decrease unemployment: Increased sales can lead to business expansion

• consumer:

  • increase unemployment: Some consumers may find it difficult to repay their mortgage or to save money while they are unemployed

  • decrease unemployment: People have more disposable income to spend on discretionary items

• challenges/opportunities:

  • increase unemployment: Increased social issues such as crime and anti-social behaviour

  • decrease unemployment: As more people are employed, increased traffic congestion can have a negative environmental impact

taxation definition

A tax is a mandatory payment or charge collected by a government from taxpayers to cover the costs of government services

what does government use tax for?

• run the country

• encourage individuals and businesses to change behaviour

• ensure a more equal distribution of wealth

impact of taxation

• government:

  • higher taxes: More tax revenue to spend in the economy on infrastructure and essential services

  • lower taxes: Less tax revenue results in less spending on services such as health and education

• business:

  • higher taxes: Cost of doing business in Ireland increases, making businesses less competitive

  • lower taxes: Lower taxes such as VAT lead to increased sales and profits
    

• consumer:

  • higher taxes: Reduced levels of disposable income, resulting in less to spend on goods and services

  • lower taxes: More disposable income gives consumers increased confidence to spend

• challenges/opportunities:

  • higher taxes: Employees may not work overtime as more wages are paid in tax and so businesses may find it difficult to meet production deadlines

  • lower taxes: Businesses can use increased profits generated from higher levels of sales demand to expand the business or pay off existing debts

impact of buisness on the economy can both ___ and ___ effect it

positively and negatively

name the ways a business can affect an economy POSITIVELY

• standard of living

• employment

• taxation

• community development

state and explain ways business can positively effect an economy

• standard of living: increased business activites brings increased services and facilities to economy

• employment: higher employment reduces social problems

• tax revenue: as a business becomes more successful pay more tax to the government

• community development: as a business becomes more profitable it sponsors local community activites

name the ways a business can affect an economy NEGATIVELY

• inflation

• infrastructure

• competition

• environment

state and explain ways business can negatively effect an economy

• inflation: businesses can increase prices to boost profits, this can lead to inflation

• infrastructure: rapid economic growth can put pressure on a country’s infrastructure

• competition: foreign completion from lost cost economy

• environment: increased business activity can cause environmental damage if it is not managed properly