Businesses are affected by the economy
An economy describes how a country spends its money
This is determined by 5 factors
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This measures how much extra an economy has produced this year compared to last year
The total amount produced in an economy is called: ross omestic roduct This means the total value of products produced within the UK
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The Business Cycle
The growth of an economy will vary, but generally increases This is called the Business Cycle, and can be shown as:
Trend is increasing growth
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Inflation is a general and sustained increase in prices
In other words its when things get more expensive!
It is measured by looking at the price of a “basket” of goods bought by most people each month
It is quoted as a percentage annual figure
E.g. inflation of 5% means that on average things are 5% more expensive now than they were this time last year
The government will want inflation to be low in order to help businesses.
Can you explain why low inflation helps businesses?
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Why is High Inflation Bad?
Inflation can cause a number of problems:
People try to save money, and so will spend less. This can create unemployment Higher prices means people are worse off
Costs will be higher, forcing prices up further.
If UK inflation is higher than elsewhere then UK companies will sell fewer goods abroad
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Where people who want a job cannot get one
It can occur for a number of reasons:
People moving between jobs
Caused by major changes in the structure of the economy
Caused by changes in the business cycle
Caused by automation, where machines take the place of workers
Caused due to changes in the seasons, e.g. Alton Towers staff
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The Effects of Unemployment
Unemployment can have good and bad effects on businesses: Effects of Unemployment
• More people looking for work • Business has greater choice when recruiting
• Will be able to pay lower wages
• People have less money to spend
• Demand will fall
• Profits may fall
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The Balance of Payments
The balance of payments (BoP) measures the level of international trade that takes place.
It is calculated as:
= Revenue from
Exports are goods and services made in the UK but sold in foreign countries
Imports are goods and services made in foreign countries but sold in the UK
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Deficit or Surplus?
If more money is spent on our exports than we spend on imports then the BoP is in SURPLUS.
Exports > Imports = Surplus
If we spend more money on imports than we receive from exports the BoP is in DEFICIT.
Exports < Imports = Deficit
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The Effects of International Trade
International trade can create