Economic Influences
Possible Causes of Deflation
A Large Fall in demand - Exogenous shocks to the economy - A global economic slowdown or recession leading to a fall in exports and investment - A rise in the exchange rate (leading to lower exports and cheaper imports) - Declines in domestic and international asset prices
Formula for YED
- % change in quantity demanded/% change in income - %change = Change/Original *100 - To work out %change in QD = YED * Income - To work out %change in income = QD/YED Must not ignore the signs
Possible Business Responses to Low Unemployment
- A chance to expand capacity to take advantage of higher demand: Growth - Adjust remuneration packages to remain competitive to attract customers - Invest in training to meet skills gap and help retain key staff - Offer more flexible working options to attract larger labour pool - consider outsourcing to access specialist skills where recruitment is tough
A fall in interest rates will lead to ...
- An increase in demand for goods - A fall in costs - A fall in the exchange rate of sterling - Incentive to Borrow - More profits generated - More employment - Increase Share Price - Demand Pull Inflation - Increase Economic Growth
Criteria for Economy Growth
- Consumer Demand Levels - Imapact on Output - Employment recruitment levels - Amount of Profit Generated - Impact on Investments - Impact on Share Price - Impact on Confidence on Investors, Consumers and the firm - Impact on Government - Impact on Inflation - Impact on Balance of Payments - Impact on Exchange Rates - Impact of Policies
3 sections to the Balance of Payments (BOP) account:
- Current Account - Capital Account - Financial Account
Business strategies in response to inflation:
- Cut internal costs to keep prices down - source from cheaper supplies - cut profit margins by not raising prices as much as costs - raise profit margins if inflation is largely caused by 'demand pull' pressure: increase prices by more than cost increases
Effects of Decrease in Taxation
- Cutting indirect taxes reduces prices, which may boost spending: especially for price-elastic products - Reductions in income tax result in consumers having higher levels of disposable income - Falling corporate taxation promotes investments and output - Reductions in corporate taxation may attract foreign investment
Types of Inflation
- Demand Pull - Cost Push
Taxation
1. Direct taxes - levied on income and capital e.g. income tax, National Insurance, Corporation tax 2. Indirect taxes - levied on expenditure e.g. value added tax (VAT), TV licence, excise duties on fuel and alcohol
Disadvantages of Economic Growth
- Rapid economic growth may lead to supply shortages (labour) - This could lead to inflation caused by higher costs - If inflation rises, so will interest rates to combat it - Economic growth can result in pollution and congestion and harm to the environment
Price Elasticity & Inflation
- Firms with inelastic price elasticity of demand will be less affected by a rise in inflation - Some firms will be able to absorb price increases by becoming more efficient - Price inflation will vary from industry to industry - be careful about making generalizations
Key Features of Boom
- High levels of output and expenditure by firms, consumers and the government - High levels of consumer demand, business confidence, profits, investment and business growth - Rising costs, increasing prices, and full capacity
Impact of Inflation on Business
- If a country has a higher rate of inflation than the rest of the world, it will lose its competitiveness on the International Market - Exports are more expensive - Cheaper Imports - Higher Prices means lower sales - Rising Wages - Suppliers may increase their prices - Difficult to forecast Sales Revenue and Profits
Key Features of Recession
- Incomes and output start to fall as demand declines - Falling levels of consumer demand, output, profit and business confidence; - Little investment - Spare capacity - Business closures - Rising levels of unemployment - (over at least a 6-month period)
Effects of Increase in Taxation
- Increases in indirect taxes such as VAT result in higher prices, cutting consumer demand - the increase in indirect taxes will cut profits and may reduce investment levels by businesses - Increases in income tax leave consumers with less disposable income, again reducing demand
Advantages of Economic Growth
- Increasing the demand for income elastic goods/services - Increase in the demand for price inelastic goods/services - Increase in demand to recruit more workers - Higher profits from increased sales - Opportunities to raise prices - Share prices are likely to increase - Investor confidence should improve - New market (target or geographic) opportunities - Government tax revenue is likely to increase leading to increased spending
Costs to the Unemployed
- Loss of income but many people have major commitments (mortgage, credit agreements) - Fall in real living standards - Increased health risks (particularly for long term unemployed) (stress/reduction in quality of diet) (Increased risk of marital break-up) (Social Exclusion) - Loss of marketable skills (human capital) (the longer the duration of unemployment, the lower the chances of finding fresh employment) - A loss of status and morale. People feel inadequate because they are unemployed sometimes this is through no fault of their own
Key Features of Slump
- Output is at its lowest - Unemployment is high - Increasing number of firms go bankrupt
Key Features of Recovery
- Output rises - Falling levels of unemployment - Rising levels of consumer demand - Rising investment - Increasing business confidence - Share price goes up - Higher profits - More business start-ups
Interest Received
- Paid by bank on cash balances held - Paid by customers if they are late settling invoices
Interest Paid
- Paid to bank when overdrawn - Paid to bank on a bank loan - Paid to credit card companies - Paid to leasing companies
External Costs of Unemployment
- Poor health, crime and poverty - Rising inequality / relative poverty between rich and poor in society - Increased risk of: Crime Family Breakdown Premature Death Chronic Illnesses
Impact of Inflation on Consumers
- Price increase can lead to higher wage demands as people try to maintain their living standards. (wage-price spiral) - Consumers buy more to beat the rising prices, e.g. petrol panic buying - Hoarding - consumers worry about not being able to afford the necessities - Consumers more aware of the price differences; substitutes increase - Workers increase wage demands which increases cost inflation
Business strategies in response to exchange rate changes (2)
- Reduce Import Content of products made in UK as imports are now more expensive - divert marketing resources to export markets - export prices will now be lower - consider sale of overseas assets as these will now be worth more in $ terms - Expand operations in the UK rather than overseas operations as buying foreign assets will now be more expensive.
Possible Business Responses to High Unemployment
- Reduced production capacity if demand falls - Headcount reductions (redundancy, recruitment freeze) - Reduce working capital (particularly inventories) - Postpone or cancel investment projects - Potentially diversify into new markets
Exchange Rates
- The price of one country's currency in terms of another - Exchange rate affects the price of both imported and exported goods; therefore profitability
Solutions for Structural Unemployment
- Training (development of relevant vocational courses) is an important part of any solution. - Also, encouraging foreign producers to work within the UK e.g. UK successful in attracting motor vehicle producers from throughout the world (lower taxation, offer grants, free housing, free training)
Government Expenditure
- Transfer Payments - Spending on the nation's infrastructure
Supply of the currency
- domestic businesses buying foreign imports - domestic population travelling abroad - domestic investors abroad
Demand for the currency
- foreign buyers of domestic goods and services - foreign tourists spending money in the country - foreign investors
Business strategies in response to interest rate changes
- reduce gearing ratio by selling assets - reduce gearing ratio by raising capital from sale of shares - offer favourable credit terms to customers - market products to appeal to customers with less disposable income - postpone expansion projects needing big investments
A rise in the level of interest rates in the UK will reduce the level of economic activity for a number of reasons:
1 - Individuals and businesses will tend to save more, so reducing the level of expenditure and production 2 - Consumers will postpone or abandon plans to purchase goods on credit, as interest charges have risen 3 - Businesses will take decisions to reduce investment plans, as the cost of borrowing has risen and fewer projects will be viable 4 - firms may reduce inventory levels in an attempt to reduce their need to borrow to obtain working capital
Government anti-inflationary policies
1) Rise in interest rates reduces the possibility of demand-pull inflation occurring • Businesses reduce investments as borrowing becomes more expensive- therefore output and sales decline. 2) Trade union legislation • to lessen the chance of cost-push inflation
Economic objectives of governments
1) Steady and sustained economic growth, avoiding the worst booms and slumps associated with trade cycle 2) Price stability/low inflation 3) Low rates of unemployment 4) A positive balance of payments (difference between exports and imports) 5) Stable exchange rate 6) Wealth and income transfers to reduce inequalities (taxation and spending)
Types of unemployment
1. Cyclical 2. Structural 3. Frictional 4. Regional 5. Seasonal
Factors that lead to economic growth
1. Increases in output resulting from technological changes and expansion of industrial capacity 2. Increases in economic resources (factors of production) 3. Increases in productivity
How is inflation measured?
1. The Consumer Price Index (CPI) 2. The Retail Prices Index (RPI)
What is economic growth?
An increase in the value of goods and services produced by an economy over time • If we experience economic growth then the economy produces more goods and services in one year compared to the last. • Economic growth provides favourable trading conditions and new business opportunities • This refers to an increase in a country's annual GDP
Interest Rates
An interest rate is the cost of borrowing money or the return for investing money
Rising Level of Economic Activity
Caused by: - Increased government expenditure or lower rates of taxation Likely effects: - Demand Pull Inflation may appear while unemployment falls as imports increase Impact on business: - Rising Wages and possible skill shortages - Sales rise and possibility of increasing prices - Increasing costs of raw materials and components (Cost Push Inflation)
Falling Level of Economic Activity
Caused by: - Reduced government spending or increased taxation Likely effects: - Increased unemployment, declining spending and production Impact on business: - Falling sales and downward pressure on prices - Rising numbers of bankruptcies, especially among small firms. - Increased level of inventories
Monetary Policy (2)
COUNTRY CONTROLS THE SUPPLY OF MONEY, OFTEN TARGETING A RATE OF INTEREST FOR THE PURPOSE OF PROMOTING ECONOMIC GROWTH AND STABILITY
Possible strategies: Recovery
Capacity expansion to cope with increase in demand (growth- TESCOS expansion EVERYWHERE!) This needs finance (loans??) (2000-2006= deregulation of finance industry= easy £££ Develop new products that will be in greater demand as consumer incomes rise (income elastic products) (ANSOFF- APPLE)
Possible Strategies: Recession/Slump
Develop new products that appeal to customers with lower disposable incomes Lower prices price war? Damage brand image? Buy cheap assets/takeovers risky in terms of financing deal improve efficiency, cost minimization (staff, cheaper suppliers,, etc),
Fiscal Policy
Fiscal policy refers to government policies based on taxation and its own expenditure and its borrowing
Balance of Payments
This is a record of a country's economic activities with other countries
Exchange Rates are caused by:
Increase in exports Increase in Domestic Interest Rates Level of Tourism Supply & Demand of Currency
Luxury Goods association with the Trade Cycle
Period of Economic Growth - increase the range of goods and services - raise prices to increase profit margins - increase output Period of Recession - offer promotions - widen product range with lower-priced models - credit terms to improve affordability
Cost of Living
Is the quantity of goods and services that a given amount of money will buy for a typical household
Normal Goods association with the Trade Cycle
Period of Economic Growth - sales aren't affected - add value to the products Period of Recession - offer promotions - lower prices - sales not affected
Monetary Policy
Monetary policy centres on adjusting the amount of money in circulation and hence the level of spending and economic activity. Monetary policy can make use of one or more of the following: • Altering interest rates • Controlling the money supply • Manipulating the exchange rate
Inferior Goods association with the Trade Cycle
Period of Economic Growth - add extra value to gain higher quality - attempt to move product upmarket Period of Recession - free consumer tests - promote good value and low prices - increase range in distribution outlets
SPICED vs WPIDEC
SPICED = Strong Pound, Imports Cheaper, Exports Dearer WPIDEC = Weak Pound, Imports Dearer, Exports cheaper
Unemployment
The number of people able, available and willing to find work and actively seeking work - but not employed.
Gross domestic product
The total value of goods services produced by an economy over a specific period • GDP measures the value of output of goods and services over a period of time by multiplying the number of goods and services produced by their price to get the value of output. • This is usually adjusted for inflation ('Real' GDP) so any increase in GDP is caused by a real increase in output not just inflation. E.g. if the value of a country's GDP increases by 6% in a year, but inflation rate is 2%, the increase in actual; output of goods and services is 4% • An increase in real GDP almost always means that the average population have more money to spend.
Supply Side Policies
These attempt to improve the working of the economy by improving the operation of free markets. The main elements of supply-side policies focus on increasing the Factors of Production: • Improving the quantity and the quality of the labour force • Limiting the power of trade unions • Reducing labour costs • Controlling state benefits applications
Market failure
This is where markets fail to achieve the most efficient allocation of resources and there is under-or overproduction of certain goods or services.
Frictional Unemployment
This occurs when people leave their jobs either voluntarily or because they are sacked or made redundant. • People moving between jobs. • If a person leaves one job they may not be able to move into a new position immediately. • They are unemployed for a period while looking for a new job
Monopoly Producers
When there is only one firm dominating the market, they have the potential to perform unfair competitive practices to help maximize their profits. E.g. - The easiest way is to cut supply and raise prices. - This will lead to demand of the goods being unfulfilled and as such is not an effective allocation of resources
Costs of a Balance of Payments Surplus
When we have a Balance of Payments surplus we have extra money in the economy. This can lead to demand Pull Inflation because very fast growth of demand for credit/borrowing and high levels of consumer spending (incomes rise).
Reducing labour costs
by making the labour market work effectively, the government hopes to allow wages to reflect local conditions. However, the introduction of the minimum wage since 1999, has imposed an artificial constraint on the operation of labour markets
Limiting the power of trade unions
one reason for restricting the power of trade unions has been to make the labour market work more effectively and to avoid the excessive wage increases and limited increases in productivity that some people associate with the exercise of trade union power
Possible Strategies: Boom
takeovers, growth, shareholder dividends increase new products, ANSOFF move to luxury products? ANSOFF Investment, (PROTECTION FOR THE FUTURE SLUMP???)
Improving the quantity and the quality of the labour force
this can be done through increasing training to provide a more committed and skilled labour force.
Transfer Payments
this is government spending on pensions, unemployment benefit and similar social security payments. Alternations in this category of government expenditure have a rapid and significant impact on consumers' spending and the level of economic activity. Recipients are generally not well off and need to spend the money to maintain their standard of living
Spending on the nation's infrastructure
this is spending on such things as roads, schools, bridges and harbors. This type of expenditure can have a double impact on business. First, the results of the expenditure can enhance the environment for firms by improving communications and cutting the costs of transportation. Second, the construction can provide work and income for firms, so boosting their profitability. The government can also encourage investment by companies through offering investment grants and tax relief
Controlling state benefits applications
those who can work will work
Interest rates and inflation
• A fall in interest rates may result in an increase in demand: • firms may consider expanding production; • Therefore more employees may be needed. • Leading to increased competition in the labour market; may create skill shortages resulting in increasing wage costs. • This could lead to inflation. • What type of inflation: Cost Push
Labour Market Failure
• An efficient labour market would require firms to provide training for their workers in order to improve their skills and knowledge. • The danger of poaching may create a general disincentive for firms to invest in training • The short-term costs and disruption of training may not be benefited if newly trained employees are enticed to work elsewhere (labour market failure). • In such circumstances, the government may be forced to intervene and provide training
Possible responses of businesses to changing trading conditions: Recession/Slump
• Begin to emphasise price competitiveness in advertising • Seek new markets for existing products • Reduce wage levels or ask them to work part time • Possible reduction in trade credit provided • Offer basic products (income-inelastic products) at bargain prices
Government policy and the business cycle
• Businesses can expect to see substantial changes in their trading conditions at different stages • The government's economic policies are likely to change along with the stage of the trade cycle • The government implements counter cyclical policies to limit the fluctuations and effects of the business cycle Slump= • The government will reduce interest rate and cut taxes. • Reducing interest rates encourage firms to borrow money and consumers may spend more if credit is less expensive Boom= • The government may raise interest rates to lower the level of economic activity. • Higher interest rates are likely to discourage investment by businesses and spending by consumers. • This can avoid resources becoming too scarce as firms attempt to produce more than available resource will allow.
Exchange Rates will affect:
• Businesses that export their goods to other countries: - Low exchange rate (weak $) - A rising $ will put up prices abroad (to get same profit margin) so demand will drop and profitability will fall. • Businesses that sell their goods in the UK, competing against foreign imports • Businesses that purchase imported goods to use in the production of their own goods: - Would prefer a high dollar exchange rate as this reduces the cost of buying goods from abroad
Businesses responses to Structural unemployment:
• Can encourage the development of capital-intensive methods of production in manufacturing and service industries. • Using technology to replace labour can boost productivity and enhance competitiveness. • Business could relocate to take advantages of more and cheaper sources of skilled labour.
Business Confidence
• Consider why business confidence is such an important factor in influencing the business cycle - High level of business confidence can become a 'self - fulfilling prophecy' - An optimistic outlook leads to higher levels of investment spending, etc, which help the economy to grow - E.g. - BBC Economic editor Robert Peston
High levels of unemployment Key Features
• Consumer incomes fall= leading sales= reduces revenue/profits • Firm Cutbacks • (i.e. training) or delays in investments • Workers will have less bargaining power= less pressure to increase wage levels. • People may be more willing to work for lower wages in order to get a job. • Less risk of industrial / strike action - fear of job losses - leading to reduced trade union power
Low levels of unemployment Key Features
• Consumers have more income = spending more = increase in income elastic goods • Fewer people looking for work its makes it difficult for firms to recruit suitably skilled/qualified individuals. • The workforce and potential applicants have more bargaining power, and firms may be forces to increase wages for existing workers= • Could lead to inflation!!!
Economic growth conclusion/summary
• Economic growth provides favourable trading conditions and new business opportunities. • It means growth and possibly new markets for existing products and market opportunities for new products • Economic growth offers more security and more confidence in planning for the future • The introduction of appropriate strategies and economic forecasting is critical.
The causes of Inflation: a self-fulfilling prophecy?
• Expectations can be an important cause of inflation. • If businesses anticipate rising inflation, they might take appropriate action, such as raising their prices in anticipation of higher charges from their suppliers. • This will, of course, itself contribute to inflation
Balance of Payments Surplus
• Export of goods greater than import of goods • Export of services greater than import of services • E.g. Investment income into UK greater than investment income leaving the UK • E.g. Contributions to the EU less than what we receive back from the EU
Possible responses of businesses to changing trading conditions: Boom
• Face increasing pressure to raise prices regularly • Seek methods to increase output (maybe producing at overseas plants) • Offer wage rises to avoid threat of industrial action • Managers plan for falling levels of demand
Costs to Firms
• Fall in demand for goods and services • People who are unemployed have less to spend on goods and services. • Falling profit margins • Lower levels of investment planned for the future • Firms may even cut back on replacement investment
Exchange Rates (2)
• Firms cannot influence the exchange rate • The £'s rate is determined by the supply and demand for sterling on international currency markets
Luxury Goods
• The YED is positive (greater than 1). • Luxury goods is one where as your income rises you will buy MORE • When your income falls you will buy LESS • E.g. holidays, electronics • Also, alternative substitutes may be classed as a luxury good as the 'expensive brands' cannot be purchased when incomes are low.
Relationship between Interest Rates & Exchange Rates
• If foreign exchange markets anticipate a rise in UK interest rates it tends to have the effect of increasing the value of the pound • Investors will look to save in UK £ due to the higher returns offered from banks. • This demand for sterling pushes up the exchange rate.
Exchange Rates (3)
• If the value of the £ rises this is called appreciation; a decline is called depreciation • The exchange rate is a good example of an external constraint that is beyond the control of a business
Balance of Payments deficits
• Import of goods greater than exports of goods • Imports of services greater than export of services • More investment income leaving a country than entering it • E.g. The UK contributing more to EU than receiving back from the EU
YED - What is it?
• Income elasticity of demand measures the relationship between a change in quantity demanded for good X and a change in income.
Inflation
• Inflation is a sustained increase in the average price level of a country • Inflation only becomes a problem when it is high or rising rapidly • It is the job of the Bank of England to set interest rates so that inflation is controlled and the inflation target is reached.
Structural Unemployment
• Occurs with fundamental changes in the economy (long term) whereby some industries reach the end of their lives. • This will impact on the skills needed by the workforce • e.g. Wales (coal), northeast (shipbuilding) Lancashire and Yorkshire (textiles) This happens due to: - New methods of production - Changes in demand/supply - Overseas competition - Change on Technology Knock on effect on associated industries
Possible responses of businesses to changing trading conditions: Recovery
• Opportunity to charge higher prices • Use more technology to replace expensive labour • Decide to invest in fixed assets • Operate nearer to full capacity: Increase output to meet expected increase in demand
Regional unemployment
• Reflects the relative prosperity (incomes) of the regions of the UK. • Traditionally, Northern Ireland, Scotland, Wales and the north of England have suffered higher rates of regional unemployment than the Midlands and the south of England.
Retail Prices Index (RPI)
• The RPI is broadly similar to the CPI (It is calculated using the same data as CPI). This is a measure used for adjusting pensions and other benefits to take account of changes in inflation • It includes mortgage repayments, council tax, road tax, and TV licence • RPI excludes university accommodation fees • It is used to calculate increases in wages, state benefits and pensions. • The ONS updates its 650-strong basket of goods and services annually, to better reflect public spending habits. • Trends in consumer technology and changing eating and drinking habits often impact on the inflation basket
Inferior Goods
• The YED is negative (less than 0). • Inferior goods have a negative income elasticity of demand meaning that demand falls as income rises. • Inferior goods are a good which people buy less of as income rises • And more of as income falls • Typically, inferior goods or services tend to exist where superior goods are available if the consumer has the money to be able to buy it.
Normal Goods
• The YED is positive (between 0 and 1). • Normal goods is one where as your income rises you will buy MORE, but at a smaller proportion. • When your income falls you will buy LESS, but at a smaller proportion. • These good tend to be essential or a necessity • Producers of 'normal goods' will not be majorly affected by any changes in the business cycle.
Business strategies in response to exchange rate changes
• The precise effect on a business will depend on the extent to which it trades abroad • Some firms sell the majority of their output in overseas markets and they can be particularly vulnerable to changes in exchange rates. • Firms in European countries that have adopted the euro, and which trade with other countries in the Eurozone, encounter no risk and have a great advantage over outsiders.
The business (trade) cycle
• The trade cycle, also known as the business cycle, describes the regular fluctuations in economic activity occurring over time in all economies. • It is characterized by 4 main phases: Boom, Recession, Slump, Recovery
Cyclical unemployment
• There is a cyclical relationship between demand, output, employment and unemployment in the overall economy Boom stage= • unemployment minimal due to an increase in demand/output • When the economy recovers and starts to grow again demand for goods and services grows again and firms will hire more workers Recession/Slump= • When the economy goes into recession, demand for goods and services falls. • Eventually firms will cut back production and workers will lose jobs.
Hyperinflation
• This is a situation where, the values of money decrease so fast that people lose confidence in it. • During this period people start to barter other commodities (e.g. gold) that have their own value or use a dependable foreign currency (US dollar)
Demand Pull Inflation
• This occurs when demand for a country's goods and services exceeds its ability to supply these products. • Prices rise as a means of limiting demand to match the available supply. • Businesses respond to high demand by raising prices to increase their profit margins • Main causes of demand pull inflation: 1 - Very fast growth of demand for credit/borrowing 2 - high levels of consumer spending (incomes rise)
Deflation
• This occurs when prices fall. • Deflation occurs when the inflation rate is negative • Firms are discouraged from investing because of the prospect of lower prices for their products • Consumers delay purchases to benefit from lower prices in the future. • Deflation occurs in industries and markets - even when the general price level is still rising • Falling prices for clothing and leisure goods • Decline in the prices of computers and audio-visual equipment • Declines in share prices (and occasionally house prices!)
Seasonal unemployment
• This occurs when the demand for certain types of labour fluctuates with the seasons of the year • Tends to be temporary and disappears in the next 'season'. • Affects certain industries more than others - Catering and leisure - Construction - Retailing - Tourism e.g. - The demand for workers in the tourist industry tends to be lower in the winter than in the summer months - Agriculture
Costs to the Economy
• Unemployment represents a waste of resources if labour is unused • The Government will lose tax revenue: • Fall in revenue from income tax and taxes on consumer spending • And reduction in revenue from corporation tax • Increased spending on unemployment benefits and other income -related state welfare payments • The Government may have to borrow more to finance the increased spending
External Costs of Market Failure
• When a producer supplies a product to the market they will want to be able to charge a price that reflects the cost of producing that product • Sometimes businesses do not consider the effects which production/consumption of a good or the production of a good has on the rest of society. • An external cost is the 'bad spill over effects' from a transaction between a producer and consumer that affects a third party • There has been market failure when the market has failed to reflect the true cost of production and the cost of the external costs. • If the external costs are not included in the price, then more of the product will be demanded and too much will be produced. • E.g. Consumers demand cheap airfares; Producers produce more cheap flights to satisfy demand = more pollution.
Costs of Balance of Payments deficits
• When we have a deficit, it is a debt that we owe to other countries we will have to pay this debt • The UK will need to borrow money to pay for this; this could lead to the government raising taxes to cover this debt • If people in the UK buy imports then they are not buying UK goods. Therefore the GDP will shrink
Current Account
• Where the quantity/volume for the purchase of sale of G&S are recorded This has 4 sections: • 1) Trade in Goods • 2) Trade in Services - Financial: • Insurance and Business Consultancy Services - Tourism and Travel including Civil Aviation - Data processing & other information services - Music & Entertainment • 3) Investment income (IPD) • (Interest, Profits and Dividends) • 4) Transfers (e.g. in the UK from EU)
Consumer Price Index (CPI)
• measures the rate of inflation based on the changes in prices of a basket of goods/services
The Capital Account and Financial Account
• this measures capital (£) flows into and out of the UK • Both focus on... • Exports: G&S (Interest, Profits and Dividends (IPD)) and transfers go overseas • Imports: G&S, investment income and transfers that come into the UK • Flows of £ into the country are given a positive sign + • Flows of £ out of the country are given a negative sign -
Cost-push inflation
• this occurs when firms face increasing costs due to factors such as rising wages or higher costs of raw materials and components • Firms raise prices to protect their profit margins • This could be caused by Imported inflation • Cost-push inflation will vary from industry to industry • Firms that need to buy significant commodity raw materials may find profit margins squeezed if they cannot pass on increased costs to customers
These strategies of changes to interest rate will depend upon
• whether the rate of interest is rising or falling • The impact of rising interest rates will depend on the size of the change as well as the initial rate. • the nature of the goods/services provided • what is happening in the economy (i.e. business cycle phase) • Depends on whether the product/service is income elastic or inelastic.
