Business - 3.7 topic 5

Analysing the external environment to assess opportunities and threats

What is GDP

Gross Domestic Product - The total value of all goods and services produced by a country in a period of time.

A measure of the level of economic activity in an economy. Includes consumer spending, business investment and government spending

What does it mean when GDP is rising / falling?

Rising- economy is growing

Falling- Economy is contracting

What does the business cycle (economic cycle) show?

• Sequence of slumps, recovery, boom and recession

• Ups & downs patterns in economy

• Changes in GDP from one quarter to the next

What does a steady increase in GDP mean?

People spending more, more jobs created, more tax is paid, workers get better pay.

What does a fall in GDP mean?

Bad for businesses and workers, recession can lad to pay freezes (no increase in pay) and lost jobs.

How does GDP affect individuals?

People pay more tax because they are earning more and spending more. More money for government to spend on public services e.g. schools.

What is the

1)Consumer and business confidence

2)Consumer spending

3)Economic growth

4)Unemployment

5)Inflation

6)Business investment

Like during a BOOM 

1) Optimistic

2) High- low levels of saving

3) Strongly positive

4)Close to zero

5)High- possibly accelerating

6)High business investment, plans to expand, entering new markets

What is the

1)Consumer and business confidence

2)Consumer spending

3)Economic growth

4)Unemployment

5)Inflation

6)Business investment

Like during a RECESSION

1)Doubts emerging

2)Falling- spending financed b credit is falling

3)GDP starts to fall

4) Low, starting to rise

5) Positive, falling

6)Lowering business investment, no expansion, replacing when needed

What is the

1)Consumer and business confidence

2)Consumer spending

3)Economic growth

4)Unemployment

5)Inflation

6)Business investment

Like during a SLUMP

1) Pessimistic

2)Falling- Consumers save to pay off debts built up during the boom

3)GDP strongly negative

4)High unemployment

5) Stable prices, maybe some deflation (falling prices)

6) Little to no business investment, redundancies

What is the

1)Consumer and business confidence

2)Consumer spending

3)Economic growth

4)Unemployment

5)Inflation

6)Business investment

Like during a RECOVERY

1) Gradually returning

2) Rising. Debts have been paid off

3) Weak, slowly improving

4)High, starting to fall

5) Price stability

6) Ideas of investment

What is taxation

Charge imposed by the government on individuals, businesses and goods and services.

Taxes on individuals affect the level of disposable income.

What is HMRC?

Her Majesty’s Revenue & Customs- Collects tax & national insurance making sure money is available to pay for the UK’s public services

Who is the money collected from?

From businesses and individuals

What does the government do with the money collected?

The NHS, Defence, police, education, benefits, pensions

What are the 3 types of tax that we have to know about?

Income tax, Corporation tax and national insurance contributions.

What is VAT?

Value Added Tax- added at different rates to the cost of many goods & services that people buy.

What is corporation tax?

Tax collected for businesses on the profits made.

What are direct taxes?

Taken directly from a persons earnings

What are indirect taxes?

Tax imposed on the goods and services bought

What is an exchange rate?

The cost of one currency in terms of another currency, the exchange rate affects the cost of imports and exports making them more or less competitive. 

What does the exchange rate influence in the world of business?

• Price of exports in international markets

• Cost of goods bought from overseas

• Revenues and profits earnt overseas

• Converting cash receipts from customers oversea

What does the acronym SPICED stand for?

Strong

Pound

Imports 

Cheaper

Exports

Dearer

What does the acronym WPIDEC stand for?

Weak

Pound

Imports

Dearer

Exports

Cheaper

What happens to exported goods when the pound is strong?

• Goods appear more expensive in international markets

• Less competitive

• Less sales

• Less revenue

What happens to imports when the pound is strong?

• Cheaper to buy same amount of supplies

• Reduced costs

• Decrease price, increase demand, increase sale

What happens to exports when pound is weak?

• Exports appear cheaper in international markets

• More competitive

• More Sales

• More revenue

What happens to imports when pound is weak?

• More expensive to buy same amount of supplies

• Increased costs

• Increase price, decrease demand, decrease sales.

What kind of pound do businesses and consumers that like and why?

A strong pound- because then imports appear cheaper in £.

Why don’t businesses who export products from the UK like a strong pound?

Because their products appear dearer in the foreign currency.

What kind of a pound do businesses and consumers who import not like and why?

Consumers and businesses who import dont like a weak pound because the imports appear dearer in £. 

Why dont businesses who export from the UK like a weak pound?

Because their products appear cheaper in the foreign currency.

What does the impact of exchange rate changes on businesses depend on?

• How much they export to other countries

• The size of the change in exchange rate

• Whether firms face strong competition from overseas firms in their domestic market

• How much a business relies on importing goods from overseas

• Price elasticity of demand for a businesses products

What is inflation?

General rise in prices or the fall in the value of money.

It affects the cost of raw materials to a business.

How is inflation measured?

By the annual % change in the level of prices as measured by consumer price index (CPI)

What are the effects of inflation on consumers?

• Money loses value- people lose confidence in money - value of savings is reduced

• Price increases- higher wage demand, people try to maintain living standards

• Consumers on fixed incomes lose out because their annual income falls.

Why is some inflation good for businesses?

• Industry wide prices enable revenues to grow

• Growing revenues and constant gross margin = higher gross profit

• Makes using debt as a source of finance cheaper in real terms.

What is the cause of inflation “demand-pull inflation” ?

This occurs when demand for goods and services is greater than the supply, causing prices to rise

What is the cause of inflation “cost-push inflation”?

This occurs when prices rise as wage or raw material costs increase, and these are then passed on to consumers in higher prices.

Why are high rates of inflation generally considered bad for businesses?

Increases the businesses costs. In order for businesses to retain profit margins a business might have to increase its prices to cover these higher costs. This may result in uncompetitive prices and loss of sales to cheaper rivals.

What is fiscal policy?

The use of government spending, taxation and borrowing to manage the economy, growth and inflation- MANAGING ECONOMIC GROWTH. By raising or lowering taxes.

What is monetary policy?

Use of interest rates and changes to money supply to achieve relevant economic objectives. -Aims to keep inflation low and stable

What is free/open trade?

When there are few or no restrictions on the trade of goods and services between countries

What is protectionism?

Measure used to restrict the flow of imports into a domestic economy.

What is the main aim of protectionism

To cushion domestic businesses and industries from overseas competition and prevent the outcome resulting solely from open trade.

Explain the 2 main types of protectionism- tariffs and quotas.

Tariffs- A duty that raises the price of imported products and causes a fall in domestic demand and expansion in domestic supply

Quotas- Limits on the quantity of imports allowed or a limit to the value of imports permitted into a country in a given time period

What are 4 benefits of protectionism?

1- Local industries allowed to thrive

2- Protects newly formed businesses

3- Protects local employment

4- Protects against import dumping

What are 4 drawbacks of protectionism?

1- Potential for retaliation

2- Higher prices for customers and less choice

3- Cost of administration

4- Extra costs for exporters

What are 4 benefits of open/free trade?

1- Access to international markets to increase sales and enable expansion

2- Opportunities to source raw materials overseas at lower prices, resulting in lower production costs

3- Lower prices for consumers

4- Makes more efficient use of scarce resources

What are 3 drawbacks of open/free trade?

1- Increased competition in the UK market from foreign businesses

2- Businesses are more susceptible to exchange rate fluctuations

3- Businesses are more susceptible to global downturns