UNIT 1. Chapter 7. External economic influences on business behaviour Flashcards Preview

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Def. Macro economics

The study of entire economy like economic output, inflation, interest rates, or governments policies, rather than individual markets.


What do the macro-economics objectives consider? (6)

• Economic growth (GDP)
• Inflation
• Unemployment
• Balance of payments
• Exchange rate stability
• Transfer of wealth


Def. GDP

Gross Domestic Product is the total value of goods and services produced in a country in one year - real GDP has been adjusted for inflation.


Def. Economic growth

An increase in a country's productive potential measured by an increase in tis real GDP.


Why is economic growth important to countries? (5)

• Increased number of quality goods and services for consumers -> higher living standards
• Increased employment due to higher levels of output, higher consumer income.
• More resources for health and education
• Reduction of absolute poverty
• Higher taxes -> higher income for the government.


Def. Business investment

Expenditure by businesses on capital equipment, new technology and research and development.


What are the factors that lead to economic growth?

• Increase in output resulting from technological changes and expansion of industrial capacity
• Increase in economic resources, such as higher working population or discovery of new resources of oil and gas.
• Increase in productivity


Def. The business cycle

The regular swings in economic activity, measured by real GDP, that occur in most economies, varying from boom conditions to recession when total national output declines.


What are the four key stages of the business cycle?

• Boom
• Recession
• Slump
• Growth/ Recovery


Explain what happens during the boom period. (3)

• Boom - A period of very fast economic growth with rising incomes and profits.
• Inflation is then caused due to high demand for goods and services -> higher prices -> higher wages are demanded -> higher costs. This causes the recession.
• Governments/central banks increase interests rates to reduce inflationary pressure.


Explain what happens during the recession period. (4)

• Recession - A period of declining real GDP. Effect of failing demand and higher interests rates makes the GDP growth slow down.
• Incomes and consumer demand falls -> lower profits.
• Higher unemployment because lower demand -> less workers needed.
• Government tax revenue falls


Explain what happens during the slump period. (2)

• Slump - A prolonged recession causes a slump where real GDP falls substantially and prices fall.
• This occurs if the government fails to take corrective economic action.


Explain what happens during the recovery period. (2)

• Recovery/Growth is eventually achieved when real GDP starts to increase again.
• This may be because corrective government action takes effect, or rate of inflation falls => the country's products become competitive and demand starts to increase.


Def. Inflation

An increase in the average price level of goods and services. It results from a fall in the value of money.


Def. Deflation

A fall in average price level of goods and services.


What causes inflation? (2)

• Cost-push causes of inflation: When business face higher costs, they raise prices to keep profits.
• Demand-pull causes of inflation: When the demand rises, producers would raise prices to increase profit margins.


The government and central bank policies to control inflation (3)

Cost push inflation:
• High exchange rate -> makes imports cheaper for the business -> less cost push inflation
Demand pull inflation:
• High interest rates -> discourage consumers from borrowing and spending.
• Higher tax rates and reduction of government spending -> Reduces consumer demand as consumers have less disposable income.


Benefits of inflation (if the rate is low) (2)

• Value of debts owed by companies will fall because the value of money is falling -> so when they are repaid, they are rapid with money of less value.
• Rising prices means that the value of land and fixed assets is higher -> increases the value of business.


Drawbacks of inflation (at high rates) (6)

• Higher wage demands
• Consumers would be more price sensitive
• Higher rates of interest
• Cash flow problems due to higher prices of raw materials etc.
• If inflation is lower in another country, it will lose competitiveness in overseas markets.
• Reluctancy to sell with extended credits periods (because when repaid the value of money is lower).


However is deflation beneficial? Effects of deflation

• Consumers delay buying because they'll wait till the prices become even lower -> lower demand -> falling profits.
• Business are less likely to borrow to invest because the amount borrowed would be of higher value later on.
• Future of profitability of new projects would be doubtful.


Def. Unemployment

This exists when members of the working population are willing and able to work, but are unable to find a job.


Def. Working population

All those in the population of working age who are willing and able to work.


What are the 3 main factors that cause unemployment?

• Cyclical unemployment
• Structural unemployment
• Frictional unemployment


Def. Cyclical unemployment

Unemployment resulting from low demand for goods and services in the economy during a period of slow economic growth or a recession. Businesses would need less employees, therefor unemployment rates go up.


Def. Structural unemployment

Unemployment cause by the structural decline in important industries, leading to significant job losses in one sector of industry.


What are the possible causes of structural unemployment?

• Changes in consumer tastes and expenditure patterns
• Improvement in technology -> employers look for adaptable and multi skilled workers.


Def. Frictional unemployment

Unemployment resulting from workers losing or leaving jobs and taking a substantial period of time to find alternative employment.


Government policies towards cyclical unemployment (2)

• The government tries to keep inflation low in order to avoid recession
• The government would try to keep the rate of exchange competitive so that level of exports wouldn't fall which would cause unemployment.


Government policies towards structural unemployment (1)

• Government can provide education and training programmes


Government policies towards frictional unemployment (1)

• Government can have better provision of job opportunities by establishing or supporting job centres.